2018 (5) TMI 498 - AT - Income Tax

MAT - computing the income u/s 115JB - prior period expenses - Held that - The reasons for disallowing the expenditure u/s 37 of the Act cannot be adopted for adding the same to the book profit u/s 115JB of the Act as the mode of computation of income under these two provisions entirely different. - We are inclined to accept the contentions of the assessee that the prior period expenses cannot be added to the book profit computed under the Companies Act for computation of income u/s 115JB of the Act. The assessee s grounds of appeal accordingly allowed. Opening balance of the provisions for bad and doubtful debts as on 1.4.2008 - Held that - AO has no jurisdiction to tinker with the net profit arrived at under the provisions of the Companies Act. There is also no doubt that the provision made for bad and doubtful debts has to be added back to the net profit. The bad debts written off ought to have been debited to the P&L A/c as per the provisions of the Companies A/c and thereafter the net profit is to be arrived at to which the adjustments under the Explanation (1) are to be made. Where the AO has no jurisdiction to tinker with the accounts of the assessee, likewise the AO has no authority to make an adjustment not provided under the explanation. Therefore, we see no reason to interfere with the order of the CIT (A) on this issue as the assessee has clearly debited the provision of ₹ 22.81 crores to the P&L A/c. The assessee s ground of appeal No.4 is accordingly rejected. Addition of provision for non moving and obsolete stock on the ground that it is a provision which has to be added to the book profit for MAT computations - Held that - The nature of the item or of expenditure cannot be determined merely by the nomenclature but the AO and the CIT (A) ought to have gone into and examined the nature of the expenditure claimed by the assessee particularly whether it has been debited to the P&L A/c. As we are satisfied that it is not a provision and has not been debited to the P&L A/c, we direct the AO to recompute the taxable income u/s 115JB of the Act without adding the provision for non moving and obsolete stock to the book profit. The assessee s ground of appeal is accordingly allowed. Provision for leave encashment as an ascertained liability and therefore, cannot be added to the book profit. Provision for Fringe Benefit Tax is not similar to the provision for Income Tax. CBDT Circular No.8/2008 dated 29.8.2005 has clarified that the FBT is a liability of the employer and is in the nature of the expenditure laid out and expended wholly and exclusively for the purpose of business or profession of the employer and therefore, is an allowable deduction for the computation of book profit u/s 115JB of the Act

Issues Involved:
1. Addition of prior period expenses to book profits.
2. Addition of provision for bad and doubtful debts to book profits.
3. Addition of provision for non-moving and obsolete stock to book profits.
4. Treatment of capital contributions and RGGVY subsidy as capital receipts.
5. Provision for leave encashment and Fringe Benefit Tax (FBT) in book profits.

Issue-wise Detailed Analysis:

1. Addition of Prior Period Expenses to Book Profits:
The assessee contested the addition of prior period expenses amounting to ?7,69,38,745 to the book profits. The AO added these expenses on the ground that they pertain to earlier years and cannot be charged against the current year’s income. The CIT(A) confirmed this addition, relying on the decision in Singareni Collieries Co. Ltd vs. ACIT, which held that prior period adjustments are not allowable while computing income under section 115JB or under the Income Tax Act. The assessee argued that these expenses crystallized in the relevant A.Y and referred to AS-5 for treatment of prior period items. The Tribunal, following the decision of the Hon'ble Madras High Court in T.N. Cements Ltd vs. DCIT, allowed the appeal, stating that prior period expenses cannot be added to the book profit computed under the Companies Act for computation of income u/s 115JB of the Act.

2. Addition of Provision for Bad and Doubtful Debts to Book Profits:
The AO added ?22.89 crores for bad and doubtful debts to the book profits, treating it as an unascertained liability. The CIT(A) confirmed this addition, citing the amendment to Explanation 1(i) to section 115JB, which mandates adding provisions leading to the diminution in the value of any asset to the book profit. The Tribunal upheld this view, stating that the bad debts written off should have been debited to the P&L A/c as per the Companies Act provisions. However, the third member, Hon'ble Vice-President, Hyderabad, concluded that the provision for bad and doubtful debts was an ascertained liability and directed the AO to allow the deduction from the book profit of ?22.89 crores while computing taxable income u/s 115JB.

3. Addition of Provision for Non-Moving and Obsolete Stock to Book Profits:
The AO added ?4,32,02,259 as a provision for non-moving and obsolete stock to the book profits. The CIT(A) agreed that it was an ascertained liability but confirmed the addition due to the nomenclature of the provision. The Tribunal directed the AO to recompute the taxable income u/s 115JB without adding the provision for non-moving and obsolete stock to the book profit, stating that the nature of the item cannot be determined merely by its nomenclature.

4. Treatment of Capital Contributions and RGGVY Subsidy as Capital Receipts:
The CIT(A) treated capital contributions from customers and RGGVY subsidy amounting to ?60,90,62,319 as capital receipts. The Revenue challenged this, but the Tribunal upheld the CIT(A)’s decision, explaining that the contributions were reflected in the balance sheet as contributions and subsidies towards the cost of capital assets. The depreciation on assets created out of these contributions was credited to the P&L account under "other income" and adjusted while computing taxable income. The Tribunal found the accounting method followed by the assessee to be correct and as per provisions of the I.T. Act and Accounting Standards.

5. Provision for Leave Encashment and Fringe Benefit Tax (FBT) in Book Profits:
The CIT(A) found the provision for leave encashment to be an ascertained liability and not to be added to the book profit. Similarly, for FBT, the CIT(A) clarified that it is not similar to the provision for Income Tax and is an allowable deduction for the computation of book profit u/s 115JB, as clarified by CBDT Circular No.8/2008. The Tribunal upheld the CIT(A)’s findings, dismissing the Revenue’s appeal on this issue.

Conclusion:
The Tribunal partly allowed the assessee’s appeal and dismissed the Revenue’s appeal, directing the AO to recompute the taxable income u/s 115JB of the Act, considering the Tribunal’s findings on each issue.

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