2005 (9) TMI 45 - HC - Income Tax

Book profit assessment - 1. Whether, the bonus, the liability of which is not provided in the accounts, and which has not been incurred as an expenditure, can be deducted for the purposes of arriving at the total income under section 115J? 2. Whether, the guidance note of the Institute of Chartered Accountants could override the provisions of the Income-tax Act so as to compute deduction claimed under section 80HHC? - There is no other mode due to which the computation made by the auditor for the purpose of working out the deduction under section 80HHC from the book profits, before arriving at the 30 per cent, of book profit as taxable income, was rightly held to be in accordance with the provisions of section 80HHC - no interference is called for in the conclusions arrived at by the Tribunal

Summary

Issues Involved:

1. Deductibility of bonus liability not provided in accounts under section 115J of the Income-tax Act.
2. Whether the guidance note of the Institute of Chartered Accountants could override the provisions of the Income-tax Act for computing deductions under section 80HHC.

Detailed Analysis:

1. Deductibility of Bonus Liability:

The primary issue was whether the bonus liability, which was not provided in the accounts and not incurred as an expenditure, could be deducted for arriving at the total income under section 115J of the Income-tax Act. The assessee, an Indian company engaged in manufacturing pesticides, had its book profit shown as Rs. 53,59,359. The Assessing Officer made an addition of Rs. 24,40,000 to the book profit for bonus liability, arguing that the liability was not provided for in the accounts and the books were maintained on a cash basis.

The Tribunal found that no adjustments other than those detailed under Explanation (a) to (ha) could be made to the book profit disclosed by the assessee. The Tribunal deleted the addition of Rs. 24,40,000 made by the Assessing Officer, stating that the foundation of section 115J is the admitted net profit shown by the assessee in its books of account, and the Assessing Officer cannot substitute this with a recomputed net profit.

The High Court upheld the Tribunal's decision, emphasizing that section 115J was introduced to ensure a minimum tax liability based on admitted book profits and not on recomputed profits by the Assessing Officer. The court reiterated that the statutory base for adjustments is the admitted net profit, and any alterations by the Assessing Officer are not envisaged under section 115J.

2. Guidance Note of Institute of Chartered Accountants vs. Income-tax Act Provisions:

The second issue was whether the guidance note of the Institute of Chartered Accountants could override the provisions of the Income-tax Act for computing deductions under section 80HHC. The assessee claimed a deduction of Rs. 14,38,513 under section 80HHC, which the Assessing Officer reduced to Rs. 13,50,929 by recomputing the base figure of book profit and disallowing the amount of depreciation debited in the books.

The Tribunal held that the computation of eligible profits for deduction under section 80HHC by the assessee was in consonance with the provisions of the Act and the Central Board of Direct Taxes (CBDT) Circular No. 680 dated February 21, 1994. The Tribunal found that the Assessing Officer's method of taking the gross turnover without accounting for discounts and commissions was incorrect.

The High Court agreed with the Tribunal, stating that the expression "turnover" refers to the aggregate price received or receivable by the company in respect of the sale of goods. The court noted that discounts and commissions allowed to customers directly affect the turnover and should be considered when computing eligible profits for deduction under section 80HHC. The court emphasized that the CBDT circular was in line with the statutory provisions, ensuring that tax benefits under section 80HHC are not reduced while computing book profits under section 115J.

Conclusion:

The High Court dismissed the appeal, upholding the Tribunal's findings that the Assessing Officer's additions to the net profit and the method of computing eligible profits under section 80HHC were not sustainable. The court reiterated the principles that adjustments to book profits under section 115J must be based on the admitted net profit and that the computation of eligible profits for deductions must consider discounts and commissions as per statutory provisions and CBDT guidelines.