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2015 (11) TMI 1135 - AT - Income TaxAddition on account of deferred tax liability - whether such excess liability was created in order to explain the other assets - CIT(A) deleted the addition - Held that - The impugned addition could not have been made by the AO for the reason that the deferred tax liability had not come to reduce the total income declared by the assessee in the return of income. The income declared in the return of income was the profit of the three divisions as per the profit and loss account as on 31.03.2003. The deferred tax liability was never an item of expenditure in the profit and loss account. Therefore, there is no question of excess liability. The other reason given by the CIT(A) that the adjustment in question in the balance sheet item cannot have any impact on the income of the assessee is also a sound basis for deleting the addition made by the AO. - Decided against revenue. Deductions u/s 80HHC - Held that - The agency commission, miscellaneous receipts and adjustment of earlier years, were not treated as profits eligible for deduction u/s 80HHC of the Act by the CIT(A). In such situation we are of the view that there can be no grievance for the revenue as projected. This ground has probably been taken on misconception that the aforesaid items of receipts were also considered as profit eligible for deduction u/s 80HHC of the Act. - Decided against revenue. Computation of books profit by considering the amount claimed as deduction by the assessee u/s 80HHC or on the basis of the amount of deduction actually allowed u/ 80HHC - Held that - If the dichotomy between eligibility of profit and deductibility of profit is not kept in mind then s. 115JB will cease to be a selfcontained code. In s. 115JB, as in s. 115JA, it has been clearly stated that the relief will be computed under s. 80HHC(3)/(3A), subject to the conditions under sub-cls. (4) and (4A) of that section. The conditions are only that the relief should be certified by the chartered accountant. Such condition is not a qualifying condition but it is a compliance condition. Therefore, one cannot rely upon the last sentence in cl. (iv) of Explanation to s. 115JB subject to the conditions specified in sub-cls. (4) and (4A) of that section to obliterate the difference between eligibility and deductibility of profits as contended on behalf of the Department. Therefore Clause (iv) of the Explanation to s. 115JB covers full export profits of 100 per cent as eligible profits and the same cannot be reduced to 80 per cent by relying on s. 80HHC(1B); argument of the Department that both eligibility as well as deductibility of the profit have to be considered together for working out the deduction as mentioned in cl. (iv) has no merit. In view of the above the AO is directed to compute the books profit by considering the amount claimed as deduction by the assessee u/s 80HHC of the Act and not on the basis of the amount of deduction actually allowed u/ 80HHC of the Act.- Decided against revenue. Unascertained liability on account of gratuity - Held that - The provision of gratuity was made by the assessee in the books of account on the basis of the report of actuarial valuation and it cannot be said that liability of the assessee on account of gratuity was unascertained liability. Therefore, the said sum cannot be added to the book profits as per clause (c) of Explanation 1 to section 115JB of the Act. - Decided against revenue. Computation of book profit from Tea Division u/s 115JB - non giving effect to Rule 8 of I.T.Rules, 1962 for agricultural income exempt u/s 10(1) - Held that - In the case of income derived from sale of tea grown and manufactured by the seller in India, the income shall be computed as if they were income derived from business and 40% of such income shall deemed to be income liable to tax. It is thus clear from the reading of Rule 8(1) that 60% of the income computed as aforesaid is to be treated as agricultural income exempt u/s 10(1) of the Act. Since 60% of the income is exempt u/s 10(1) of the Act. The Assessee s claim is that 60% of the income which is exempt in terms of Rule 8 of the Rules, is nothing but income exempt u/s.10(1) of the Act and hence the same should be reduced from the book profits under Explanation 1 clause (ii) listing amounts to be reduced u/s 115JB of the Act The provisions of Sec.115JB of the Act are on the same basis as that of Se.115J of the Act. There is no reason why the aforesaid principle laid down in the CBDT Circular, which is in tune with the provisions of law referred to above, should not be applied to the computation of books profits u/s.115JB of the Act. We therefore hold that the determination of books profits u/s.115JB of the Act should be worked out by the AO on the lines indicated in the Circular. We hold that the determination of books profits u/s.115JB of the Act should be worked out as done by the Assessee and in accordance with the directions laid down in the Circular referred above. - Decided in favour of assessee.
Issues Involved:
1. Addition of Rs. 6,41,000 on account of deferred tax liability. 2. Deduction under Section 80HHC. 3. Determination of book profit under Section 115JB, including the treatment of provision for gratuity. 4. Computation of book profit for Tea Division under Rule 8 and Section 10(1). Detailed Analysis: Issue 1: Addition of Rs. 6,41,000 on account of deferred tax liability The Assessing Officer (AO) added Rs. 6,41,000 to the total income of the assessee, arguing that the excess liability shown in the balance sheet needed to be included in the total income. The assessee contended that deferred tax liability was an adjustment in the Profit and Loss Appropriation Account and did not affect the total income computation. The CIT(A) agreed with the assessee, noting that the deferred tax entries were in compliance with AS-22 issued by ICAI and were mere adjustments without income elements. The Tribunal upheld this view, confirming that the deferred tax liability did not reduce the total income and dismissing the Revenue's appeal on this ground. Issue 2: Deduction under Section 80HHC The AO had deducted agency commission, miscellaneous receipts, and adjustments of earlier years from the profits and gains from business, arguing these were not related to the textile division and thus not eligible for deduction under Section 80HHC. The CIT(A) found that these items were not treated as profits eligible for deduction under Section 80HHC, leading the Tribunal to dismiss the Revenue's appeal on this ground, noting a misconception by the Revenue. Issue 3: Determination of book profit under Section 115JB The AO denied the deduction under Section 80HHC for computing book profits under Section 115JB and added provisions for gratuity as unascertained liabilities. The CIT(A) directed the AO to allow the deduction under Section 80HHC and delete the addition of gratuity provisions, considering them ascertained liabilities based on actuarial valuation. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's ruling in Ajanta Pharma Ltd. vs. CIT, which clarified that 100% of export profits should be considered for deduction under Section 115JB, not the reduced percentage under Section 80HHC(1B). The Tribunal also agreed that the provision for gratuity was an ascertained liability and should not be added to book profits. Issue 4: Computation of book profit for Tea Division under Rule 8 and Section 10(1) The AO included 100% of the composite income from the tea division in the book profit under Section 115JB, contrary to the assessee's claim that only 40% should be included, with 60% treated as agricultural income exempt under Section 10(1). The CIT(A) upheld the AO's decision. However, the Tribunal reversed this, citing Rule 8 and a CBDT Circular, which clarified that 60% of the composite income should be considered agricultural income and exempt under Section 10(1). The Tribunal directed the AO to compute book profits accordingly, allowing the assessee's appeal. Conclusion: The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal, directing appropriate adjustments and computations as per the discussed provisions and judicial precedents.
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