2015 (1) TMI 1023 - HC - Income Tax

MAT computation - deferred revenue expenditure towards (advertisement publicity distribution and sales promotion) debited to the P s Board as per the Companies Act when maintaining regular books of accounts could be modified and other years expenditure can be claimed during the current assessment year itself when computing Book profits u/s.115JB of the Act upheld by Tribunal - Tribunal reversing the finding of the appellate authority that before allowing deduction under Sec. 80HHC of the Income Tax Act the unabsorbed loss and depreciation should be carried forward and set off and only in respect of the balance deductions should be allowed - Held that - As is clear from Section 115JA of the Act it deals with the deemed income . It is not the actual income earned by the assessee. The object behind it is to prevent the assessee from adjusting the accounts or manipulating the accounts so as to avoid payment of tax on the ground that they have not earned any profit at all. When once the assessee has incurred an expenditure and it is deducted in terms of Part-II of Schedule-VI of the Companies Act and the profit is arrived at merely because in the printed P & L account for the purpose of showing to the shareholders that a profit is made by the Company the entire expenditure is not deducted and a portion of it is shown as a deferred expenditure the assessee cannot be denied the benefit of actual expenditure incurred. The assessee is not showing the actual expenditure incurred to avoid payment of tax. On the contrary when the actual expenditure is given deduction to the profit margin gets reduced. It is by showing it to the P & L account a portion of it as a deferred payment artificially the profit has gone up. The object of Section 115JA being to avoid adjustment of account manipulation of figures to avoid payment of tax. When the assessee has actually incurred expenditure and the tax liability is less when compared with the net profit arrived at after giving deduction to the actual expenditure the tax payable is on that net profit and not on the fancy figure shown in the P & L account for the purpose of showing profit to the shareholders. In other words to find out what is net profit one has to look into the books of accounts maintained by the company and the profit and loss account prepared on the basis of such book of accounts. What is shown in the printed balance sheet is for the benefit of the shareholders as it will not reflect the true state of affairs and that cannot be made the basis for levying tax under the Act. This is precisely what the Tribunal has held. Neither under the Companies Act nor under the Income Tax Act this concept of deferred expenditure is recognized. That is a pathology used by the chartered accountants to show to the shareholders that the company has made profit though it has not earned profits. It is nothing but a window dressing and the authority should not be mislead or guided by this balance sheet which is prepared to satisfy the shareholders. It is the P & L account prepared on the basis of the books of accounts as contemplated in Part-II of Schedule VI which should form and assist to find out what is the profit earned and on that profit tax is levied. - Decided in favour of assessee.

Summary

Issues Involved:
1. Interpretation of Section 115JA of the Income Tax Act, particularly Sub-section (2) read with the explanation.
2. Whether the Tribunal was correct in upholding the case of the assessee that deferred revenue expenditure debited to the P & L account could be modified and claimed during the current assessment year when computing book profits under Section 115JA.
3. Whether the Tribunal's finding that the assessee is entitled to prepare a profit and loss account for the purposes of Section 115JA by claiming the entire expenditure as revenue expenditure is correct.
4. Whether the Tribunal's decision to allow deferred revenue expenditure (ex-gratia payment spread over 2 years) to be claimed during the current assessment year when computing book profits under Section 115JA is correct.

Detailed Analysis:

Issue 1: Interpretation of Section 115JA of the Income Tax Act
The court examined the purpose and interpretation of Section 115JA, which deals with the computation of book profits for the purpose of levying Minimum Alternate Tax (MAT). The section mandates that the profit and loss account should be prepared in accordance with Parts II and III of Schedule VI of the Companies Act, 1956. The court emphasized that the net profit as shown in the profit and loss account, certified by the statutory auditors and approved by the company, is deemed to be the income for tax purposes. The court referred to the Supreme Court's judgment in Apollo Tyres Ltd. vs. Commissioner of Income Tax, which held that the Assessing Officer does not have the jurisdiction to re-scrutinize the accounts accepted by the authorities under the Companies Act.

Issue 2: Deferred Revenue Expenditure and Book Profits
The court addressed whether the deferred revenue expenditure debited to the profit and loss account and carried to the balance sheet could be modified and claimed during the current assessment year when computing book profits under Section 115JA. The Tribunal had held that the Act does not recognize deferred revenue expenditure, which is a concept from the accounting world. The court agreed with the Tribunal's view that the entire expenditure should be treated as revenue expenditure for the purposes of Section 115JA, even if it is shown as deferred in the published accounts.

Issue 3: Preparation of Profit and Loss Account for Section 115JA
The Tribunal had allowed the assessee to prepare the profit and loss account for the purposes of Section 115JA by claiming the entire expenditure as revenue expenditure. The court upheld this finding, stating that the profit and loss account prepared in accordance with the Companies Act should be the basis for computing book profits. The court reiterated that the Assessing Officer's role is limited to verifying whether the accounts are certified by the authorities under the Companies Act and does not extend to re-assessing the company's income.

Issue 4: Claiming Deferred Revenue Expenditure
The court examined whether the Tribunal was correct in allowing the deferred revenue expenditure (ex-gratia payment spread over 2 years) to be claimed during the current assessment year when computing book profits under Section 115JA. The court held that deferred revenue expenditure is not recognized under either the Companies Act or the Income Tax Act. The court emphasized that the actual expenditure incurred should be deducted to determine the net profit, and any artificial inflation of profits by deferring expenditure should not be considered for tax purposes.

Conclusion:
The court dismissed the appeals, upholding the Tribunal's decision that the assessee is entitled to claim the entire expenditure as revenue expenditure for the purposes of Section 115JA. The court emphasized that the profit and loss account prepared in accordance with the Companies Act should be the basis for computing book profits, and deferred revenue expenditure is not recognized under the Act. The substantial questions of law were answered in favor of the assessee and against the revenue.