2005 (12) TMI 266 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of the claim of repairs due to earthquake for calculating book profit under section 115JB of the Act.
2. Classification of the liability as unascertained for the purpose of computation of book profit under section 115JB of the Act.

Issue-wise Detailed Analysis:

1. Disallowance of the Claim of Repairs Due to Earthquake for Calculating Book Profit under Section 115JB of the Act:

The assessee claimed a provision of Rs. 84,22,000 for earthquake repairs. The Assessing Officer (AO) observed that the assessee had added back Rs. 73,92,610 in the statement of B income but did not add it back while computing book profit under section 115JB. The AO held that provisions for meeting liabilities other than ascertained liabilities must be added back to compute book profit under section 115JB. The AO thus added back Rs. 73,92,610 to the book profit.

The CIT(A) confirmed the AO's action without providing independent observations.

The assessee contended that the earthquake caused significant damage to their factory, and the District Industries Centre, Rajkot, assessed the loss at Rs. 84.22 lakhs. The assessee incurred Rs. 10,29,390 in the year under consideration and Rs. 71.84 lakhs in the following year. The total expenditure was Rs. 82.13 lakhs, with the remaining Rs. 2.09 lakhs reversed as provision no longer required.

The Departmental Representative argued that the profit and loss account must be drawn as per the Companies Act, which does not allow such provisions for repairs while determining net profit.

The Tribunal considered the rival contentions and the provisions of the Income-tax Act and Companies Act. It noted that section 115JB is a code for computing book profit, and the profit and loss account must comply with Parts II and III of Schedule VI of the Companies Act. The Tribunal found that the earthquake damage was scientifically determined by a government agency, and the provision for repair was an ascertained liability. The Tribunal cited the Supreme Court's decision in Apollo Tyres Ltd. v. CIT, which limited the AO's power to examine whether the books of account are certified under the Companies Act.

2. Classification of the Liability as Unascertained for the Purpose of Computation of Book Profit under Section 115JB of the Act:

The AO classified the provision for earthquake repairs as an unascertained liability, requiring it to be added back to the book profit under section 115JB. The Tribunal disagreed, stating that the provision for repair was an ascertained liability, as the loss was scientifically determined by the District Industries Centre. The Tribunal emphasized that the AO does not have the jurisdiction to re-examine the entries in the books of account certified under the Companies Act.

The Tribunal found the CIT Departmental Representative's reliance on sections 348 and 349 of the Companies Act, 1956, irrelevant, as these sections pertain to the computation of remuneration payable to managing agents, not the computation of book profit under section 115JB.

Conclusion:

The Tribunal concluded that the addition of Rs. 73.92 lakhs for computation of book profit, treating it as an unascertained liability, was not legally and factually sustainable. The Tribunal directed the AO to delete the disallowance of Rs. 73,92,610 while computing book profit under section 115JB of the Income-tax Act.

Result:

The appeal of the assessee was allowed.