2009 (9) TMI 639 - AT - Income Tax

Reopening - Waiver Of Interest By Government - permission from the Committee on Disputes (CoD) to file these appeals - Book Profit u/s 115JA - Reduction of provisions from net loss - AO does not have the jurisdiction to go behind the net profit shown in the P&L a/c except to the extent provided in the Explanation to s. 115J - the statutory auditors have given a qualified certificate, more particularly the non-incorporation of waiver benefits - since the details of capital restructuring proposal approved by the Government of India have been disclosed in the notes on accounts, any reference made to the P&L a/c shall include such notes also - these three provisions can only be classified as the provision made for diminution in the value of assets. Hence all these three provisions fall outside the purview of cl. (c) of Explanation to s. 115JA - The provision for future losses does not relate to any liability. According to paras 55 and 56 of AS-29, no provision is required to be made for future operating loss, as it does not meet the definition of liability. Once it is not considered as a liability, the question of adding the same for computing book profit under s. 115JA does not arise product warranty falls within the definition of a contingency, which means that though it is a liability as on the date of balance sheet, in view of the uncertainty surrounding the claims, it would fall under the category of unascertained liability . Hence it is liable to be added to the book profit as per cl. (c) of Explanation to s. 115JA - except the provision made for guarantee repairs amounting to Rs. 1.10 crores, all other provisions would fall outside the purview of s. 115JA - Appeals are partly allowed

Issues Involved:
1. Levy of interest under Section 234B of the Income Tax Act.
2. Reduction of provisions from net loss for computation under Section 115JA.
3. Reduction of loans and interest waived from net loss for computation under Section 115JA.

Detailed Analysis:

1. Levy of Interest under Section 234B:
The assessee raised an additional ground questioning the levy of interest under Section 234B for both assessment years. However, this ground was not raised before the CIT(A) and the Committee on Disputes (CoD) permission was not obtained for raising this additional ground. Consequently, the tribunal declined to admit this additional ground and proceeded to dispose of the grounds originally raised.

2. Reduction of Provisions from Net Loss for Computation under Section 115JA:
For the assessment year 1999-2000, the assessee contested the reduction of provisions amounting to Rs. 5,43,13,196 from the net loss for computation under Section 115JA. The AO added the amount under the head 'Provisions and losses', which included:
- Provision for doubtful debts: Rs. 3,95,363
- Provision for reduction in ship repair bills: Rs. 4,76,92,514
- Provision for obsolescence of materials: Rs. 62,26,319
- Losses on account of unlinked advances: Rs. 7,11,598

The CIT(A) deleted the last item but confirmed the other three additions. The tribunal noted that these provisions relate to diminution in the value of assets and not to liabilities. Hence, these provisions fall outside the purview of clause (c) of Explanation to Section 115JA, and directed the AO to delete these items from the computation of book profit.

For the assessment year 2000-01, similar provisions amounting to Rs. 108.67 crores were added by the AO. The tribunal categorized the provisions as follows:
- Provision for doubtful debts, reduction in ship repair bills, and obsolescence of materials were considered as provisions for diminution in the value of assets and thus fall outside the purview of clause (c) of Explanation to Section 115JA.
- Provision for future losses was not considered a liability and hence not required to be added for computing book profit.
- Provision for liquidated damages was considered an ascertained liability as it was quantified based on delays that had already occurred.
- Provision for guarantee repairs was akin to product warranty, considered a contingency, and thus an unascertained liability, liable to be added to the book profit.
- Provision for leave encashment was quantified based on the number of days of leave at the credit of each employee and considered an ascertained liability, falling outside the purview of Section 115JA.

3. Reduction of Loans and Interest Waived from Net Loss for Computation under Section 115JA:
The assessee did not account for the waiver of loans and interest amounting to Rs. 591.13 crores in its books, though disclosed in the annual report. The AO added the interest waiver of Rs. 312.68 crores to the book profit under Section 115JA. The tribunal held that the AO is entitled to recompute the book profit by including the waiver benefits that had already accrued to the assessee.

The tribunal noted that the statutory auditors had given a qualified certificate due to non-incorporation of waiver benefits, which allowed the AO to correct the omissions. The tribunal also referenced the decision of the Hon'ble Supreme Court in Apollo Tyres Ltd. vs. CIT, emphasizing that the AO can examine whether the books of accounts are certified by the authorities under the Companies Act.

The tribunal concluded that the AO rightly included the interest amount waived by the Government in the computation of book profit under Section 115JA, as the waiver benefits had accrued during the relevant financial year.

Conclusion:
The tribunal partly allowed both appeals of the assessee, directing the deletion of certain provisions from the computation of book profit under Section 115JA while upholding the inclusion of interest waived by the Government.

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