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2007 (3) TMI 295 - AT - Income TaxMAT - Deferred tax liability - differences between taxable income and accounting income - Nature of reserve - Unascertained liabilities - Tax on profit distributed as dividend u/s 115O - Fringe Benefit Tax - Whether the deferred tax charge is the charge of income-tax, which is liable to be added in Explanation (a) to sub-section (2) of section 115JB or the same should be treated as an amount credit to reserve within the meaning of Explanation (b) to sub-section (2) of section 115JB? - HELD THAT - Deferred tax means the tax effect of timing difference due to differences between taxable income and accounting income for a period that originate in one period and is capable of reversal and, therefore, such deferred tax charge is a provision for tax effect of difference between taxable income and accounting income and not provision for income-tax paid or payable and, therefore, could not be covered under Explanation (a) to subsection (2) of section 115JB. We have also noted down the objective behind enacting AS-22 by the ICAI, as deferred tax charge was meant to remove the difference between taxable income and accounting income arising due to difference between items of revenue and expenses as appearing in the statement of Profit Loss A/c and the items which are considered as revenue expenses or deduction for tax purposes or there are difference between the amount in respect of a particular item of revenue or expense as recognized in the statement of profit and loss and the corresponding amount, which is recognised for the computation of taxable income. Therefore, it is absolute apparent that deferred tax charge could not be termed as income-tax paid or payable, which has to be paid out of the profit earned by the assessee for the year under consideration and, therefore, in our considered opinion, the first objection raised by the revenue does not hold any merit. Nature of reserve - Though the ld. DR has argued that such deferred tax liability should be treated at par with other reserve as the same has been debited to the profit loss a/c and all the conditions stipulated in the provision are fulfilled. However, such contention of the ld. DR could not be accepted keeping in view our observation hereinabove while observing differences between the reserve as stipulated in clause (b) to sub-section (2) of section 115JB and the reserve created for deferred tax liability. The guidelines of ICAI also advice to treat deferred tax charge separately than reserve as stipulated in clause (b) to Explanation to sub-section (2) to section 115JB. We, therefore, dismiss this second limb objection raised by revenue while disputing the order of ld. CIT(A). Unascertained liabilities - The revenue has not disputed the calculation of such deferred tax charge by the assessee which has been made as per guidelines stipulated in AS-22 by ICAI and the computation of deferred tax charge is scientifically made and globally accepted, the same could not be considered as an unascertained liability within the meaning of Explanation (c) to sub-section (2) of section 115JB. Moreover such calculation of deferred tax charge by the assessee has not been disputed by the revenue and such calculation of deferred tax liability has also been accepted as reasonable ascertained by ld. D.R. while arguing the case for the Department. We are, therefore, of the view that this third limb of objections raised by the revenue is also devoid of any merit. We, therefore are of the opinion that deferred tax charge is not covered by any of the clauses of the Explanation to sub-section (2) to section 115JB as objected by the revenue before us, and therefore, in our considered opinion, such deferred tax charge is not required to be added back in the computation of book profit for the purpose of section 115JB and Hence, ld. CIT(A) was justified in deleting the addition made by the Assessing Officer in not accepting the claim of the assessee on account of such deferred tax charge. We, therefore, uphold such order of ld. CIT(A) in this regard and reject the ground raised by the revenue. Dividend distributed u/s 115-O - HELD THAT - Since income-tax is payable on the income earned by the assessee, tax on dividend as per the provision of section 115-O is paid at the time of distribution of profit in the form of dividend i.e., at the time of application of the income on which income-tax has already been paid. Furthermore as per sub-section (2) of section 115-O makes it clear that tax on distribution of profit has to be paid by a domestic company even if no income-tax is payable in the year in which dividend is distributed by the company. We have also considered the order of Tribunal, Panaji Bench in the case of Salgaocar Mining India (P) Ltd. 2006 (1) TMI 221 - ITAT PANAJI , wherein interest on income- tax was excluded from the said clause as both were to be treated separately. Since in the present case also, tax on distributed profit is different than income-tax payable, the same cannot be covered under clause (a) to Explanation to sub-section (2) of section 115JB. Fringe benefit tax - HELD THAT - In our considered opinion on distribution of profit payable as per provision of section 115-O of the Act is of similar nature as fringe benefit tax payable under Chapter XII-H of the Act, since both are payable at the time of incurring certain expenditure which is in the form of fringe benefit given to employees or dividend to shareholders, which are not otherwise taxable under the other provisions of the Act. Therefore, in our considered opinion, both fringe benefit tax and tax on distribution of profit are similar in nature. Since Circular No. 8 issued by the CBDT makes it clear that fringe benefit tax is an allowable deduction in the computation of book profit u/s 115JB of the Act while dealing in question, a copy of which is also available on record, in our considered opinion, the ld. CIT(A) has rightly treated the tax on profit distributed as dividend in similar manner as fringe benefit tax and has thereafter rightly directed the Assessing Officer not to add back such tax on distributed profit in the computation of book profit for the purpose of section 115JB. We, therefore, do not see any reason to interfere with such order of ld. CIT(A) and accordingly uphold his order and reject the grounds raised by the revenue. In the result, the appeal filed by the revenue is dismissed.
Issues Involved:
1. Allowability of deferred tax for determining book profit under section 115JB of the Income-tax Act, 1961. 2. Allowability of tax paid under section 115-O on distributed dividend for determining book profit under section 115JB of the Income-tax Act, 1961. Issue-wise Detailed Analysis: 1. Allowability of Deferred Tax for Determining Book Profit under Section 115JB: The Revenue contested the decision of the CIT(A) to allow deferred tax in determining book profit under section 115JB. The Assessing Officer (AO) had added the deferred tax amount to the book profit, arguing that deferred tax is a provision for tax effect of differences between taxable income and accounting income and is reflected as a liability in the balance sheet. The AO cited that deferred tax is not deductible under Parts II & III of Schedule VI of the Companies Act, 1956. The assessee argued that as per Accounting Standard 22 (AS-22) issued by the Institute of Chartered Accountants of India (ICAI), deferred tax is an expense that should be deducted when computing net profit. They contended that book profit under section 115JB should be determined based on net profit after deducting all expenses, including deferred tax. The assessee emphasized that the AO cannot alter the book profit by making additions not specified in the Explanation to section 115JB(2), referencing the Supreme Court decision in Apollo Tyres Ltd. v. CIT. The CIT(A) agreed with the assessee, stating that deferred tax liability is not an unascertained liability and should not be added back to the book profit. The CIT(A) also noted that deferred tax is not equivalent to income-tax paid or payable and is not a reserve. The Tribunal upheld the CIT(A)'s decision, emphasizing that deferred tax is a scientifically measured, ascertained liability and not a provision for income-tax paid or payable. It is distinct from reserves and is computed according to AS-22, which mandates its treatment as an expense. The Tribunal concluded that deferred tax charge is not covered by any clauses of the Explanation to section 115JB(2) and should not be added back in the computation of book profit. 2. Allowability of Tax Paid under Section 115-O on Distributed Dividend for Determining Book Profit under Section 115JB: The Revenue challenged the CIT(A)'s decision to allow tax paid under section 115-O on distributed dividend to determine book profit. The AO had refused to entertain the assessee's claim, arguing that such tax is outside the purview of adjustments for book profit under section 115JB. The CIT(A) allowed the assessee's claim, drawing a parallel between tax on distributed dividend and fringe benefit tax, which is deductible in computing book profit as per CBDT Circular No. 8 dated 29-8-2005. The CIT(A) reasoned that both taxes are incurred at the time of certain expenditures and should be treated similarly. The Tribunal agreed with the CIT(A), noting that tax on distributed profit is fundamentally different from income-tax paid or payable, as it is levied at the time of distribution of profit, not on the income earned. The Tribunal also referenced the Panaji Bench decision in Salgaocar Mining India (P.) Ltd., which distinguished between income-tax and interest on income-tax. The Tribunal concluded that tax on distributed profit is similar to fringe benefit tax and should not be added back in the computation of book profit under section 115JB. Conclusion: The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. Deferred tax was deemed not to be added back in computing book profit under section 115JB, and tax on distributed dividend under section 115-O was allowed as a deduction in determining book profit.
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