2012 (7) TMI 150 - AT - Income Tax

Addition made in the book profit u/s 115JB - claim of interest capitalized in earlier years written off during the current year - Held that - Though the assessee company had already claimed the interest amount on year to year basis for the purpose of income tax, no benefit was required to be claimed in this year and consequently, in the course of assessment proceedings itself asked the AO to disallow the said amount and the AO, in doing so also, added same amount to the book profits for the computation of tax u/s 115JB - AO is not competent to make an addition to the book profits for an amount as the net profit had already been computed as per provisions of the Companies Act. The said amount does not fall under any of the specific items given in clause (a) to (i) of explanation (1) to section 115JB, which can be added back to the book profits for the purposes of taxation - in favour of assessee. Addition made in the book profit u/s 115JB - creation of provision for employee benefits resulting in increasing the value of current liabilities equivalent to the diminution of the value of current assets - retrospective amendment made by Finance Act 2009 applicable w.e.f. 1.4.2001 to specifically include any amount, set aside as provision for diminution in the value of any asset - Held that - The AO has based his disallowance on the ground that creation of the impugned provision has led to the decrease in the value of assets of the company, though no specific diminution has been pointed out in the value of a particular asset. The assessee had to increase the current liability because of the creation of this provision as there was no amount in the general/revenue reserves as on the required date and therefore same can not be held to be fault on the part of the assessee as the provision had to be created because of adoption of accounting standard 15 meant increase in the liability of the assessee company - provision created is on account of ascertained liability and the same should logically be excluded out of the calculation of book profits Clause (c) of Explanation (1) of Section 115JB - in favour of assessee.

Summary

Issues:
1. Deletion of addition in book profit under Section 115JB for interest capitalized and provision for employee benefits.

Analysis:

Issue 1: Deletion of addition for interest capitalized:
The Revenue challenged the deletion of an addition of Rs. 34,05,937 in the book profit under Section 115JB. The Assessing Officer (AO) disallowed this amount, claiming it was interest capitalized in earlier years and written off in the current year. The company agreed to the disallowance, stating it had claimed the amount yearly and debited it in compliance with accounting standards. The AO disallowed the amount to prevent double deduction without providing a detailed basis for the disallowance. The company argued that the net profit had been computed per the Companies Act, and the AO could not add this amount to book profits under Section 115JB. The Commissioner of Income Tax (Appeals) (CIT(A)) agreed with the company, citing legal provisions and case law, and deleted the addition. The CIT(A) found the interest expenditure did not fall under specific items for addition back to book profits under Section 115JB.

Issue 2: Deletion of addition for provision for employee benefits:
The Revenue contested the deletion of an addition of Rs. 2,11,33,889 in the book profit under Section 115JB for a provision for employee benefits. The AO added this amount, arguing that creating such a provision diminished the value of assets. The CIT(A) disagreed, referencing legal provisions, Supreme Court decisions, and High Court judgments. The CIT(A) noted that the provision was for an ascertained liability and should be excluded from book profits calculation under Section 115JB. The CIT(A) found no logic in the AO's view that every provision creation would reduce asset value, as it would render deductions for ascertained liabilities meaningless. The CIT(A) upheld the deletion of the addition based on the factual and legal aspects of the case and relevant case laws.

Conclusion:
The Appellate Tribunal upheld the CIT(A)'s decisions to delete the additions in book profit for interest capitalized and provision for employee benefits. The grounds of appeal raised by the Revenue were dismissed, and the appeal was ultimately dismissed. The general nature of the remaining grounds of appeal did not require separate adjudication.