2016 (2) TMI 697 - AT - Income Tax

Prior period adjustments- Held that - We have observed that the assessee had already claim depreciation allowances over the period and has claimed interest expenses either in a capitalized form or in Revenue form on the asset against the liability existent. The said liability no longer remains during the year under consideration. In fact the expenses was also claimed during the past years. The submission made by the assessee before the Assessing Officer that the same should have been treated prior period adjustments of ₹ 3,41,25,895/- and the same has been treated as Revenue receipt for the tax purposes. In light of this, the matter is remitted back on the short issue to the Assessing Officer.

Summary

Issues Involved:
1. Addition of amount transferred from capital reserve account to Profit & Loss Account under prior period adjustment.
2. Addition of principal amount of loan waived by the bank transferred to Profit & Loss Account under Section 115JB of the Income Tax Act.

Analysis:

Issue 1: Addition of amount transferred from capital reserve account to Profit & Loss Account under prior period adjustment
The Assessing Officer (AO) added the amount transferred by the appellant company from the capital reserve account to the Profit & Loss Account under prior period adjustment to the income of the assessee. The AO relied on Section 41(1) of the Act, stating that the remission of the liability should be deemed as profit. The AO held that since the amount was not offered for tax in earlier years, it cannot be reduced from the book profit under Section 115JB of the Income Tax Act. The AO emphasized that the amount was never offered for tax and, therefore, should be added back to the income of the assessee. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the addition, stating that the liability ceased to exist in the relevant year due to the unilateral act of the assessee, and there was no provision under the Act for claiming the income as exempt.

Issue 2: Addition of principal amount of loan waived by the bank transferred to Profit & Loss Account under Section 115JB of the Income Tax Act
The appellant company argued that the remission of the principal amount of the loan by the bank in the financial year 1997-98, which was transferred to the capital reserve account, should not be added to the income of the assessee in the year under consideration (F.Y 2008-09). The appellant contended that the liability ceased to exist in 1997-98, and mere transfer of the amount from one account to another does not make it taxable. The appellant also cited legal precedents where waiver of the principal amount of a loan was held not chargeable to tax. The Appellate Tribunal observed that the liability no longer existed during the year under consideration as the expenses had been claimed in previous years. The matter was remitted back to the Assessing Officer for further examination.

In conclusion, the appeal was partly allowed for statistical purposes, and the matter was remitted back to the Assessing Officer for detailed examination based on the submissions made by the appellant regarding the treatment of the amounts transferred and the waiver of the loan principal amount.