2021 (10) TMI 217 - AT - Income Tax

Computation of book profit u/s. 115JB of the Act by excluding prior period item - difference in net profit/loss taken by the assessee and the AO on account of provision for gratuity relating to earlier years as prior period item - HELD THAT - For all practical purposes, the net profit as per books of account for the relevant period is net profit computed without making any adjustment by deducting prior period items or other appropriations made in the current financial year. If you go by this analogy then, provision for gratuity relating to earlier years claimed by the assessee under the head 'prior period items' comes below the line in profit loss account. If you consider provision for gratuity relating to earlier years as item comes below the line of profit loss account, then for the purpose of computation of book profit, net profit as per books of accounts should be considered before allowing deduction for provision for gratuity relating to earlier years. There is no error in reasons given by the AO to compute book profit u/s. 115JB of the Act by taking net profit as per profit loss account before considering deduction claimed for prior period item being provision for gratuity relating to earlier years.

Issues involved:
1. Interpretation of provisions of section 115JB of the Income Tax Act, 1961 regarding adjustment for gratuity provisions.
2. Determination of book profit for assessment year 2006-07.
3. Consideration of prior period items in the computation of book profit under section 115JB.

Detailed Analysis:
1. The appeal raised concerns about the Commissioner of Income Tax (Appeals) decision, arguing that the adjustment made by the appellant for provisions of gratuity related to earlier years should be allowed as per section 115JB of the Income Tax Act, 1961. The appellant contended that the provision for gratuity, based on actuarial valuation, should be deductible in arriving at the quantification of book profits. The Assessing Officer (AO) had accepted a book loss for tax computation under normal provisions but determined a higher book profit under section 115JB, disregarding the appellant's deduction claim for gratuity provision. The appellant's position was that the provision for gratuity was disclosed separately in the Profit and Loss Account for prior period items only, which the CIT(A) did not consider.

2. The core issue revolved around the computation of book profit under section 115JB for the assessment year 2006-07. The appellant argued that the AO had erred in not considering the provision made for gratuity in the books of accounts while computing the net loss for the year. On the other hand, the Departmental Representative supported the CIT(A)'s decision, emphasizing that the provision for gratuity was debited below the line in the profit & loss account, implying it should be considered under Explanation -1 to section 115JB. The Tribunal analyzed the provisions of section 115JB, highlighting that adjustments to book profit were limited except as provided under Explanation (1). The Tribunal referenced the decision in the case of M/s. Apollo Tyres Ltd. vs. CIT, emphasizing that the AO could not make any adjustments beyond those specified in Explanation (1).

3. The Tribunal further deliberated on the treatment of prior period items, such as the provision for gratuity relating to earlier years. It was established that prior period items, whether expenses or income, are typically shown below the line in the profit & loss account. Therefore, the net profit as per books of account is calculated without adjustments for prior period items or other appropriations made in the current financial year. The Tribunal concluded that the provision for gratuity relating to earlier years, categorized as a prior period item, should not be considered for deduction in the computation of book profit under section 115JB. The Tribunal upheld the CIT(A)'s decision, dismissing the appeal and affirming the computation of book profit by excluding prior period items.

In conclusion, the Tribunal's judgment focused on the interpretation of section 115JB of the Income Tax Act, 1961, particularly regarding the treatment of provisions for gratuity and prior period items in the computation of book profit for the assessment year 2006-07. The decision emphasized adherence to the provisions of the Act and established legal principles, ultimately upholding the CIT(A)'s findings and rejecting the appellant's grounds.

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