2003 (5) TMI 196 - AT - Income Tax

Summary

Issues Involved:

1. Computation of taxable income u/s 115JA of the Income-tax Act.
2. Treatment of the amount written back from provisions and reserves.
3. Interpretation of the term "provision" in the context of ascertained and unascertained liabilities.

Summary:

Issue 1: Computation of taxable income u/s 115JA of the Income-tax Act

The assessee, a limited company engaged in manufacturing non-woven fabrics, filed its return for the assessment year 1997-98 declaring taxable income of Rs. 82,44,896 u/s 115JA. Later, a revised return declared a loss of Rs. 26,83,740 under normal provisions and nil income u/s 115JA. The Assessing Officer (AO) observed a net profit of Rs. 5,62,42,271, which included a write-back of liabilities amounting to Rs. 4,18,63,960. The AO concluded that the book-profit for the year would remain at Rs. 562.42 lakhs, as the amount written back could not be reduced from the book-profit under the proviso to Explanation (i) of section 115JA.

Issue 2: Treatment of the amount written back from provisions and reserves

The CIT(A) observed that the amount of Rs. 4,18,63,920 represented a provision for interest created in earlier years and written back in the current year. The CIT(A) noted that this provision was not allowed as a deduction in the relevant years due to section 43B. The CIT(A) concluded that the proviso to Explanation (i) did not apply, as the provision was made before the assessment year 1997-98. However, the CIT(A) introduced a new issue, stating that the provision for interest could not be considered a provision for unascertained liability, thus justifying the AO's decision not to reduce the amount from the book-profit.

Issue 3: Interpretation of the term "provision" in the context of ascertained and unascertained liabilities

The learned counsel for the assessee argued that the CIT(A) erred in equating the term "provision" in clause (i) with "provision made for meeting liabilities, other than ascertained liabilities" in clause (c). The counsel referred to the Supreme Court's definition in Metal Box Co. of India Ltd. v. Their Workman, which differentiates between reserves and provisions. The counsel contended that the provision for interest was made for an existing liability, which was later waived, and thus should be reduced from the book-profit as per clause (i) of the Explanation to section 115JA(2). The Tribunal agreed with the counsel, stating that the provision was for an unascertained liability, and the amount written back should be reduced from the book-profit to avoid double taxation.

Conclusion:

The Tribunal directed the AO to deduct the amount of Rs. 4.18 crores from the book profits for the purpose of computation of income u/s 115JA of the Act, allowing the appeal in favor of the assessee.