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TMI Blog2011 (1) TMI 289X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 54,168,537 appearing after appropriation and extra ordinary item and not Rs. 1,08,98,948 being the profit figure arrived at ‘above line’ Cessation of liability - In the present case, the assessee did not claim nor was allowed any deduction or benefit of allowance by way of allowable expenditure and trading liability, and the same being credited to the profit and loss account had been subjected to tax as part of book profit under section 115JB of the Act - The Special bench of the Hyderbad Tribunal in the case of Rain Commodities Ltd. v. DCIT (2010 -TMI - 203366 - ITAT HYDERABAD) has held that profit on sale of capital assets credited to the profit and loss account is includible in computing Book profits, notwithstanding the fact that the same is exempted under the normal provisions of the Income tax Act on account of the investment of capital gains in an approved mode – Appeal is dismissed - 5810/MUM/2008 - - - Dated:- 5-1-2011 - PRAMOD KUMAR ACCOUNTANT J. ASHA VIJAYARAGHAVAN JUDICIAL MEMBER J. Appellant by: Shri Vijay Kothari Respondent by: Shri Naresh Kumasr Balodia ORDER Per Smt. Asha Vijayaraghavan Judicial Member : This appeal filed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... EXPENDITURE Expenses 13,041,723 Assets written off 3,154,372 Depreciation 495,325 TOTAL EXPENDITURE 16,691,420 Profit ( Loss ) before taxation 10,848,955 GTB liability settled 44,513,406 Previous years expenses 1,193,824 Balance of profit and loss account 54,168,537" 1.4. In form No. 29B, filed along with the return, the auditors have stated that the tax payable u/s 115JB to be nil. In the annexure to the said form, the auditors had taken the starting point for computing book profit u/s 115JB at Rs. 108,48,955 It has then been submitted in column 12 that Rs. 1,08,48,955 is fully reduced by unabsorbed depreciation of previous years. The AO on the other hand has taken the starting point for computing the book profits at Rs. 5,41,68,537 and then gone on to reduce the unabsorbed depreciation of the previous years amounting to Rs. 1,02,15,376 and thereby, arriving at the book profit figure of Rs. 4,39,53,161 for the purposes of 115JB. 1.5. The question that arises is whether the assessee was correct in start ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t profits or losses in respect of transactions not usually undertaken or undertaken in exceptional circumstances or which are of non recurring nature should be shown in the profit and loss account. The aggregate amount of dividends paid and proposed are also to be shown in the profit and loss account. The point we are trying to drive home is that all the items which are generally classified in the appropriation account are in fact to be included in the profit and loss account prepared as parts II and III of Schedule VI. Therefore we are in agreement with the argument of the learned counsel that the starting point for computation of book profits for the purposes of section 115JB should be Rs. 660.81 lakhs which is the final balance in the profit and loss account carried to balance sheet. It may also be noted from the above discussion that even extraordinary items have to be debited to the profit and loss account. Having adopted the figure of Rs.660.81 Lakhs as the starting point, the same has to be increased by the items specified in clauses (a) to (f) and has to be reduced by the items specified in clauses (i) to (vii) given in the explanation. No other adjustment is perm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit under Schedule VI it will be worthwhile to reproduce the section 115JB which reads as under:- "115JB ( 1 ) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company the Income-tax payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after ( the 1st day of April ( 2010 ) is less than ( fifteen per cent ) of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of ( fifteen per cent ) " ( 2 ) Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 ( 1 of 1956 ) : ( i ) the accounting policies; ( ii ) The accounting standard adopted for preparing such accounts including profit and loss account; ( iii ) The method and rates adopted for calculating the depreciation shall be the same as have been ado ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dited to the profit and loss account; Provided that where this section is applicable to an assessee in any previous year, the amount withdrawn form reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions ( out of which the said amount was withdrawn ) under this Explanation or Explanation below the second proviso to section 115JA, as the case may be ; or ( ii ) the amount of income to which any of the provisions of ( section 10 other than the provisions contained in clause ( 38 ) thereof ) or section 11 or section 12 apply, if any such amount is credited to the profit and loss account; or ( iia ) the amount of depreciation debited to the profit and loss account ( excluding the depreciation on account of revaluation of assets ) ; or ( iib ) the amount withdrawn from revaluation reserve and credited to the profit and loss account, to the extent it does not exceed the amount of depreciation on account of revaluation of assets referred to in clause ( i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income-tax, if any, as levied by the Central Acts from time to time] . 8. From a reading of the section, it is apparent that the net profit taken for the purpose of computation of book profit is to be increased by items like Income tax payable, amounts carried to any reserve, amount set aside for provisions for meeting any unascertained liability, the amount by way of losses of subsidiary, amount of dividend paid or proposed etc. Further the profits are to be reduced by any amount withdrawn from the reserve if it was created prior to April, 1997 or which was added in computing the book profit in the year in which it was made, should be excluded in computing the Book profits. From the above, it is very clear that the net profit figure to be taken is only after the appropriation i.e. , below the line. Otherwise, adding to/reducing from the book profits the appropriations like amount carried to reserve, amount withdrawn form the reserve, the provisions made for diminution in value of assets, provisions for meeting liability etc. as per the explanations become unworkable. Therefore the language of section 115JB is very clear to indicate that starting point of the profit and loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovided in cl. ( f )( i ) which deals with withdrawal of reserves representing profits taken to the reserves in the earlier years. So also adjustment is provided for in respect of excess provision written back into the profit and loss account in cl. ( f )( i ) of the explanation. But nowhere is there any mention for adjustment of prior period expenses such as arrears of depreciation no matter whether it is looked upon as a charge against the profit or as an appropriation of profit. The Legislature which has referred to parts II and III of Schedule VI to the Companies Act must be credited with the knowledge of several items that appear in the profit and loss account including the appropriations found therein. Therefore, any item which is not earmarked for adjustment in the Explanation cannot be brought within the mischief of the explanation to section 115J. In other words the assessing authority has no jurisdiction to make additions or subtractions as he likes contrary to what is specifically provided for in section 115J. 10. This decision of the Tribunal has been approved by the Apex Court in their decision in the case of Appollo Tyres Ltd. reported in 255 ITR 273. Thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if it is a capital receipt, which may or may not be taxable under the normal provisions of the Income tax Act, if it is credited to the profit and loss account cannot be excluded in computing the book profit, unless it is specifically excluded under any of the Explanations found in that section. 14. The Bombay High Court in the case of CIT v. Eschjay Forgings Ltd . reported in 251 ITR 15, has held that additional liability on account of exchange fluctuation connected with purchase of plant and machinery even though treated as capital under section 43A of the Income tax Act should be allowed as revenue expenditure while computing book profits because the assessee has debited the exchange difference in its profit and loss account. The jurisdictional High Court has held that treatment in the Income tax Act has no relevance in computing the book profit. In the same decision the Bombay High Court has held that provisions made in Wealth Tax is an allowable deduction in computing the book profit while the same is not allowable while computing the profit under the normal provisions of the Act. 15. The Jurisdictional High Court in the case of CIT v. Veekaylal Investment Co. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts, I am unable to come to any conclusion as to the previous year during which these expenses have accrued. In column 22 ( b ) of the Tax Audit Report it has been mentioned that debit of Rs. 11,93,824 is on account of prior period expenses. I am therefore, left with no option but to agree with the AO that these expenses have not accrued during the previous year. This ground of appeal is dismissed. " 23. In our opinion as the Assessee had furnished all the details, the CIT(A) ought to have examined the accrual of liability. We therefore feel that it requires further investigation whether the expenditure can be said to have accrued during the year and therefore allowable. Under the circumstances we set aside the issue to the file of the CIT(A) for deciding the same in accordance with law. 24. The next ground of appeal is against the confirmation by Commissioner of Income Tax (Appeals) of disallowance of Rs. 4,01,128 out of cash expenses incurred wholly and exclusively for the purpose of appellants business merely for the reason that the said expenses were evidenced by self made vouchers and were not supported by third party bills. The AO has made an addition of Rs. 4,01,12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x erred in including the entire Amount of benefit of Rs. 4,45,13,405 arising on settlement with Global Trust Bank Ltd., in the gross total income of the appellant and while doing so he amongst others failed to appreciate that the said amount was not entirely assessable u/s 41 ( 1 ) as deemed income of the appellant for the Asst. Year 2003-04." 30. Additional Grounds: This ground of appeal reads as follows: "The learned Deputy Commissioner of Income Tax erred in including the entire amount of benefit of Rs. 4,45,13,405 arising on settlement with Global Trust Bank Ltd., in the gross total income of the appellant and while doing so he amongst others failed to appreciate that the said amount was not entirely assessable u/s 41 ( 1 ) as deemed income of the appellant for the AY 2003-04". 31. In its submissions dated 17.7.2008, the appellant has stated that loan written back, amounting to Rs. 4,05,94,522 and credited to the P L account is not taxable u/s 41(1). The appellant has given details of the loan amount as well as the interest accrued which has been written back in the P L account. It has been submitted that the principle amount of loan has not been claimed as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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