2023 (2) TMI 446 - AT - Income Tax

Computation of book profits for the purpose of MAT under the provisions of sec.115JB - assessee has treated advances from customers as liability in the books of accounts pending recognition of income - HELD THAT - If advances received by the assessee from customers on which TDS Credits has been claimed, has been offered as income of subsequent financial years, then the same needs to be recognized as income as and when such income accrues to the assessee. When the assessee has treated advances from customers as liability in the books of accounts pending recognition of income in subsequent financial years, it cannot be said that the assessee has not followed the provisions of Companies Act, 1956, more particularly, Part-II III of Schedule-VI of Companies Act, 1956 while preparing its accounts - AO cannot make any adjustments to re-compute book profit u/s.115JB of the Act, because said item does not come under any of the items of adjustments specified in Clause (a) to (f) of Explanation (1) to Sec.115JB of the Act and thus, we direct the AO to delete additions made towards income admitted to claim TDS Credits while computing book profit u/s.115JB of the Act. Prior period expenses excluded while computing book profit - As we find that as per Part-II III of Schedule-VI of Companies Act, 1956, the assessee is mandatorily shown separate items of prior period expenses and income to disclose the effects in the profits or loss for the current year. In this case, no doubt the assessee has shown prior period expenses in accordance with Part-II III of Schedule-VI of Companies Act, 1956 - while computing book profit u/s.115JB of the Act, the assessee has shown prior period expenses along with other items of expenses of the current financial year contrary to provisions of Part-II III of Schedule-VI of Companies Act, 1956. Assessee has taken profit before tax after deducting prior period expenses while computing book profit. However, for the purpose of computing profits gains of business and profession added back prior period expenses to arrive at income chargeable under the head profits gains of business . I Assessee has not prepared its accounts in accordance with Part-II III of Schedule-VI of Companies Act, 1956, and thus, we are of the considered view that the AO is very well empowered to re-compute book profit for the purpose of Sec.115JB of the Act. Therefore, we are of the considered view that there is no merit in the arguments of the assessee on this issue and thus, we reject the ground taken by the assessee and sustain the additions made by the AO towards prior period expenses items to be excluded while computing book profit u/s.115JB of the Act. Appeal filed by the assessee partly allowed.

Issues:
1. Computation of book profits for the purpose of MAT under sec.115JB of IT Act 1961.
2. Adjustments to book loss for assessment year 2008-09.
3. Compliance with Companies Act 2003 and Accounting Standards of ICAI.
4. Treatment of income for TDS credits under Accounting Standards.
5. Treatment of prior period expenses while computing book profit under sec.115JB.

Issue 1: Computation of book profits for the purpose of MAT under sec.115JB of IT Act 1961:
The appeal challenged the order of the Commissioner of Income Tax (Appeals) regarding the computation of book profits for the assessment year 2008-09 under sec.115JB of the IT Act 1961. The appellant argued that adjustments made to re-compute the book loss or income under normal provisions of the IT Act for assessment purposes were not applicable to the computation of income for MAT purposes. The appellant contended that the adjustments made by the authorities were not in line with the provisions of sec.115JB, and the book profit computation should be restored as per the return filed.

Issue 2: Adjustments to book loss for assessment year 2008-09:
The appellant raised concerns regarding two adjustments made to re-compute the book loss or income for assessment year 2008-09. These adjustments included income admitted to claim TDS credits and the exclusion of prior period expenses. The appellant argued that these adjustments were permissible under the normal provisions of the IT Act 1961 but were not applicable for computing income liable for assessment under sec.115JB of the Act. The appellant sought the deletion of these additions to restore the income computed by the assessee for tax liability purposes.

Issue 3: Compliance with Companies Act 2003 and Accounting Standards of ICAI:
The appellant emphasized the importance of maintaining accounts in accordance with the provisions of the Companies Act 2003 and the Accounting Standards of ICAI. The appellant argued that the adjustments made by the authorities were not in line with the mandatory requirements for maintaining company accounts, which should have limited the adjustments permissible for computing book profits under sec.115JB of the IT Act.

Issue 4: Treatment of income for TDS credits under Accounting Standards:
The appellant contested the treatment of income offered for TDS credits, arguing that it should not be considered as income for the assessment year under sec.115JB. The appellant highlighted that Accounting Standards recognize income only when it has accrued during the previous year, and thus, the treatment of TDS credits income should align with these standards.

Issue 5: Treatment of prior period expenses while computing book profit under sec.115JB:
The appellant challenged the disallowance of prior period expenses while computing book profit under sec.115JB of the IT Act 1961. The appellant argued that the treatment of prior period expenses should follow the Accounting Standards, which allow debiting such expenses to the profit & loss account of a subsequent year. The appellant contended that the disallowance of prior period expenses did not align with the provisions of sec.115JB and the adjustments specified in Explanation (1) to the section.

In conclusion, the ITAT Chennai partially allowed the appeal, directing the AO to delete the additions made towards income admitted for TDS credits while computing book profit under sec.115JB. However, the additions made towards prior period expenses were sustained as the appellant's treatment did not comply with the requirements of the Companies Act 2003 and Accounting Standards.

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