2019 (6) TMI 1475 - AT - Income Tax

Book profit determination as per the provisions of section 115JB - assessee has made provision of interest on delayed payment - Rectification of mistake u/s 154 - mistake as crept i.e., in the P L account, an amount as debited towards provision for interest for delayed payments and the same was not added back for arriving book profit u/s 115JB - HELD THAT - Provision of interest on delayed payment, which has two segments, first segment is the part of the provision, which assessee has negotiated and finalized the liability and other segment is part of the provision, for which assessee has determined the gross liability, which was not negotiated or finalized during this AY. Assessee follows this procedure regularly over the years. The gross liability of interest is adjusted in the subsequent year and the excess or short of liability are adjusted in the subsequent P L A/c, which has an impact in the subsequent AY. Similarly, current AY also, assessee makes similar adjustments. Considering the method of accounting adopted by the assessee and also the submission of ld. DR, in our view, assessee should disclose the above transactions in the manner in which the correct book profit is determined as per the provisions of section 115JB. AO has only disallowed the ascertained liability without giving effect to the actual settlement of ascertained liability of earlier year. It will give clear and proper book profit. Hence, we direct the AO to follow the above direction and determine the actual book profit. Accordingly, ground raised by the revenue is allowed for statistical purposes.

Summary

Issues:
1. Rectification of book profit under section 115JB due to non-inclusion of provision for interest for delayed payments.
2. Whether the provision for interest on delayed payments is an ascertained or unascertained liability.
3. Whether the mistake in computation of book profit is apparent from the record.

Analysis:
1. The appeal was filed by the revenue against the order of the CIT(A) regarding the rectification of book profit under section 115JB for AY 2012-13. The Assessing Officer rectified the book profit by adding a provision for interest for delayed payments that was not included initially. The CIT(A) deleted this addition after considering the submissions of the assessee, stating that the provision was already covered in the profit as per section 115JB. The revenue challenged this decision before the ITAT, arguing that the provision for interest on delayed payments was not included in the book profit as per the Companies Act. The ITAT upheld the revenue's appeal for statistical purposes, directing the AO to determine the actual book profit by considering both the provision and the actual settlement of liabilities from previous years.

2. The revenue contended that the provision for interest on delayed payments was an unascertained liability, citing the assessee's submissions and accounting practices. The revenue argued that the provision was not credited to specific parties, unlike ascertained liabilities, and highlighted the negotiations with suppliers resulting in non-payment of the provision. The ITAT acknowledged the two segments of the provision: negotiated and finalized liabilities, and gross liabilities pending negotiation. Considering the method of accounting adopted by the assessee, the ITAT directed the AO to include both segments in determining the book profit under section 115JB, ensuring adjustments for settlements from previous years.

3. The revenue asserted that the mistake in computing the book profit was apparent from the record, as the provision for interest on delayed payments was not added despite being an unascertained liability. The revenue emphasized that the AO had the details of the provision during assessment but failed to include it in the book profit calculation. The ITAT agreed with the revenue's argument, stating that the mistake was rectifiable under section 154 of the Act since it was evident from the assessee's submissions and the AO's oversight. The ITAT upheld the addition made by the AO, emphasizing the need to rectify the computation error for determining the correct book profit.

In conclusion, the ITAT allowed the revenue's appeal for statistical purposes, directing the AO to consider both the provision for interest on delayed payments and the actual settlement of liabilities from previous years in determining the book profit under section 115JB for AY 2012-13.