2004 (4) TMI 276 - AT - Income Tax

Summary

Issues Involved:
1. Interpretation of Section 115JB regarding book profits.
2. Deductibility of Rs. 12,00,000 provision written back.
3. Jurisdiction of Assessing Officer (AO) under Section 115JB.
4. Applicability of Supreme Court decision in Apollo Tyres Ltd. vs. CIT.

Detailed Analysis:

1. Interpretation of Section 115JB regarding book profits:
The primary issue revolves around the interpretation of Section 115JB, particularly the calculation of book profits. The assessee, a private limited company, filed a return declaring nil income for the assessment year 2001-02. The AO noticed a sum of Rs. 12,00,000 credited as "provision for contingencies written back" in the Profit & Loss (P&L) account, leading to a net profit of Rs. 9,60,595. The AO invoked Section 115JB and computed the taxable income, adjusting for unabsorbed losses and depreciation.

2. Deductibility of Rs. 12,00,000 provision written back:
The assessee contended that the Rs. 12,00,000 provision written back should be deducted while computing book profits under clause (i) of the Explanation to Section 115JB. The provision comprised Rs. 6,00,000 each for the director's salary debited in the assessment years 1998-99 and 1999-2000, which was not payable due to company losses. The CIT(A) upheld the AO's decision, rejecting the assessee's claim based on the Supreme Court's decision in Apollo Tyres Ltd. vs. CIT.

3. Jurisdiction of Assessing Officer (AO) under Section 115JB:
The CIT(A) ruled that the AO does not have jurisdiction to go behind the net profit shown in the P&L account, except as specified under the Explanation to Section 115JB(2). The assessee argued that the adjustment was covered under clause (i) of the Explanation to Section 115JB, and the provision for the director's salary was conditional on the company's profitability.

4. Applicability of Supreme Court decision in Apollo Tyres Ltd. vs. CIT:
The Departmental Representative supported the CIT(A)'s order, relying on the Supreme Court's decision in Apollo Tyres Ltd., which limited the AO's jurisdiction to adjust book profits prepared according to the Companies Act. The Department argued that the Rs. 12,00,000 represented an ascertained liability, not a provision, and thus was not deductible under the Explanation to Section 115JB.

Judgment:
The Tribunal reversed the CIT(A)'s order, emphasizing the purpose of Sections 115J, 115JA, and 115JB, which aim to levy minimum tax on book profits of certain companies to prevent zero-tax companies from avoiding tax. The Tribunal noted that the assessee company incurred commercial losses and was not manipulating accounts to reduce tax liability. The Tribunal held that the Rs. 12,00,000 provision was indeed a contingent liability, as no salary was payable due to company losses in the relevant years. The Tribunal concluded that the assessee was entitled to deduct the Rs. 12,00,000 provision while computing book profits under Section 115JB, as it aligned with the intended purpose of the law and avoided undue hardship and injustice.

The Tribunal's decision underscored that the AO's interpretation was hyper-technical and contrary to the spirit of the law. The Tribunal also clarified that the Supreme Court's decision in Apollo Tyres Ltd. did not support the Department's case, as it restricted the AO's jurisdiction to adjust book profits prepared according to the Companies Act. The Tribunal allowed the assessee's appeal, granting the deduction of Rs. 12,00,000 for computing book profits under Section 115JB.