2017 (9) TMI 474 - AT - Income Tax

MAT computation - Addition on account of provisions for gratuity and provisions of leave encashment made u/s 115JB to the book profit - Held that - CIT(A) has deleted the above addition because of the reason that the provision of leave encashment as well as the provision of the gratuity are meant on the actuarial valuation as per the accounting standard 15 of Ministry of Corporate Affairs and both the liabilities are ascertained liability and therefore they cannot be stated to be an understated liability. In view of this we do not find any infirmity in the order of the Ld. CIT(A) in deleting the about disallowance. Adjustment on account of accumulated losses on account of profit of sick industrial company - Held that - Clause (vii) of explanation 1 of section hundred and 15 JB of the income tax act provides that the amount of profits of sick industrial company for the assessment year commencing on and from the assessment year relevant to the previous year in which the said company has become sick industrial company under subsection (1) of section 17 of the sick industrial companies (special provisions) act, 1985 and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses was required to be reduced from the profit under section hundred and 115JB of the Act. Therefore, apparently, if the assessee s net worth has become positive during the year then assessee is eligible for the deduction of the profits of sick industrial companies which Ld. CIT(A) is granted. However, the Ld. CIT(A) has noted that there are certain errors in noting of the figures of the profit, net worth of the assessee company. Therefore, in the interest of Justice we set aside the issue to the file of AO to verify the figures that when the net worth of the company has become positive and accordingly, if it has become so during the year, then grant the deduction of the above amount. Set aside issue to the file of the AO with a direction to verify the computation of net worth.

Summary

Issues:
1. Adjustment to book profit under section 115JB - provision for gratuity, provision for leave encashment, and adjustment on account of accumulated losses of a sick industrial company.
2. Deletion of additions by Ld. CIT(A) leading to revenue's appeal.
3. Net worth calculation and deduction eligibility under section 115JB.

Analysis:
1. The appeal filed by the revenue challenged the Ld. CIT(A)'s deletion of adjustments made by the assessing officer to the book profit of the assessee under section 115JB of the Income Tax Act. The adjustments included provisions for gratuity, leave encashment, and accumulated losses of a sick industrial company. The Ld. CIT(A) deleted these adjustments, prompting the revenue's appeal.

2. The first ground of appeal by the revenue focused on the addition of provisions for gratuity and leave encashment to the book profit, which were deleted by the Ld. CIT(A). The Ld. CIT(A) reasoned that these provisions were ascertained liabilities based on actuarial valuation and accounting standards, hence not understated liabilities. The Tribunal dismissed this ground, upholding the Ld. CIT(A)'s decision.

3. The second ground of appeal by the revenue concerned the deletion of an addition to the book profit related to accumulated losses of a sick industrial company. The Ld. CIT(A) deleted this addition, citing a positive net worth of the company. However, discrepancies in the figures were noted, leading the Tribunal to set aside the issue to the assessing officer for verification. The Tribunal directed the assessing officer to ascertain the net worth accurately and allow the deduction if the net worth turned positive during the relevant year.

4. The Tribunal's decision partially allowed the revenue's appeal, setting aside the issue of net worth calculation for further verification. This comprehensive analysis outlines the key issues, arguments, and decisions made in the legal judgment regarding adjustments to book profit under section 115JB of the Income Tax Act.