2012 (6) TMI 562 - HC - Income Tax

MAT - Whether Tribunal was right in holding that earlier year s bonus is to be deducted from the book profit under section 115J - assessee took the contention that the Assessing Officer should have deducted the bonus paid as well as the from the net profit arrived, since the donation and the bonus were actual cash outgoings from the current year s profit should have been deducted from the net profit - in computing the profit and loss account as per Part II of Schedule VI to the Companies Act, these expendi- ture really go in the computation of the profit and loss account - Held that - when the profit and loss account of the assessee-company disclosed the net profit as Rs. 24,85,760 in accordance with Parts II and III of Schedule VI to the Companies Act, the assessee is not entitled to have the deduction of amounts assessed on the profit and loss appropriation account in the computation of net profit. tax case appeal allowed

Issues Involved:

1. Deductibility of earlier year's bonus from book profit under section 115J of the Income-tax Act.
2. Interpretation of net profit computation as per Schedule VI to the Companies Act.
3. Applicability of the Supreme Court's decision in Apollo Tyres Ltd. v. CIT.
4. Treatment of donations and bonus payments in profit and loss account versus profit and loss appropriation account.
5. Precedents and similar judgments from other High Courts.

Detailed Analysis:

Issue 1: Deductibility of Earlier Year's Bonus from Book Profit under Section 115J

The primary question of law was whether the Tribunal was correct in holding that the earlier year's bonus should be deducted from the book profit under section 115J. The assessee argued that the bonus paid amounting to Rs. 9,59,501 and donations of Rs. 11,151 should be deducted from the net profit of Rs. 24,85,760, as they were actual cash outgoings from the current year's profit. The Commissioner of Income-tax (Appeals) agreed, stating that these expenses must be deducted to arrive at the profit under section 115J. The Tribunal upheld this view, noting that the bonus liability accrued in the relevant previous year and should not be treated as a prior period expense.

Issue 2: Interpretation of Net Profit Computation as per Schedule VI to the Companies Act

The Revenue contended that the net profit should be computed strictly as per Schedule VI to the Companies Act, without further deductions, as supported by the Supreme Court's decision in Apollo Tyres Ltd. v. CIT. The Assessing Officer should adhere to the net profit shown in the profit and loss account, which was Rs. 24,85,760, without additional deductions for bonus and donations.

Issue 3: Applicability of the Supreme Court's Decision in Apollo Tyres Ltd. v. CIT

The Supreme Court's decision in Apollo Tyres Ltd. v. CIT was pivotal, where it was held that the Assessing Officer must accept the authenticity of the accounts maintained under the Companies Act. The officer's power is limited to making adjustments as provided in the Explanation to section 115J. The court emphasized that once the accounts are certified and filed, the Assessing Officer cannot go behind the net profit shown, except for adjustments specified in the Explanation.

Issue 4: Treatment of Donations and Bonus Payments in Profit and Loss Account versus Profit and Loss Appropriation Account

The assessee argued that the bonus and donations were part of the current year's expenses and should be deducted from the net profit. However, the Revenue maintained that the net profit of Rs. 24,85,760, as declared, should not be adjusted further. The Kerala High Court's unreported decision in a similar case was cited, where it was held that prior period expenses shown in the profit and loss appropriation account could not be deducted from the net profit for section 115J purposes.

Issue 5: Precedents and Similar Judgments from Other High Courts

The Delhi High Court's decision in CIT v. Khaitan Chemicals and Fertilizers Ltd. was discussed, where it was held that prior period expenses should be deducted from net profit. However, the facts of the present case were distinguished, as the assessee had declared net profit after meeting all expenses, including bonus payments. The Kerala High Court's decision in Sree Bhagawathy Textiles Ltd. v. Asst. CIT was also referenced, supporting the Revenue's stance that deductions not made in the profit and loss account could not be considered for computing net profit under section 115J.

Conclusion:

The High Court agreed with the Revenue, stating that the net profit of Rs. 24,85,760, as disclosed in the profit and loss account, must be accepted without further deductions for bonus and donations. The court allowed the tax case appeal, set aside the Tribunal's order, and answered the substantial question of law in favor of the Revenue, emphasizing adherence to the Supreme Court's ruling in Apollo Tyres Ltd. v. CIT.

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