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TMI Blog2011 (3) TMI 547X X X X Extracts X X X X X X X X Extracts X X X X ..... he books it was claimed as "Net prior period charges/credits Regarding provision of terminal benefit - It is not in dispute that, in the instant case, the impugned amount of Rs. 9.08 crores has been appropriated towards the terminal benefits of the employees of the assessee company viz., graturity and pension payable, on the basis of actuarial valuation - In the instant case, though the amount provided for the terminal benefits has been transferred to a "Reserve Fund", in our view, the amount so provided relates to a provision only - Since the said provisions falls in the category of "Ascertained liability", the same is allowable while computing the book profit under section 115JB. - ITA NO. 315/VIZAG./2007 - - - Dated:- 14-3-2011 - ORDER Shri B.R. Baskaran, Accountant Member: ‑ The appeal of the assessee is directed against the order dated 23.04.2007 passed by Learned CIT(A), Visakhapatnam and it relates to the assessment year 2001-02. 2. The Learned CIT(A) has confirmed the additions made while computing the income both under normal provisions of the Act and under section 115JB of the Act. Hence the assessee is contesting the said additions under both the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) The impugned amount claimed under the head "Net Prior period credits/debits was transferred to another company named APTRANSCO in view of the agreement entered after finalization of accounts, i.e. almost after 2 years. (b) Even if it is taken as a liability, it falls in the category of "Liability other than as ascertained liability" and hence the same is liable to be disallowed under section 115JB. Accordingly the Assessing Officer computed income under section 115JB of the Act by taking the net profit at Rs. 1,12,38,786. To the said profit, the Assessing Officer added the expenditure amount of Rs. 9.08 crores booked to provide for the terminal benefits, since the assessee had transferred the same to a "Reserve Fund". Thus the Assessing Officer determined the income under section 115JB of the Act at Rs. 10,20,45,752 and levied tax thereon. 4. The assessee carried the matter in appeal before Learned CIT(A) and its contentions did not find favour of Learned CIT(A). Hence the first appellate authority dismissed the appeal of the assessee. Aggrieved, the assessee is in appeal before us. 5. We have heard the rival contentions. First we shall take up the issues relating to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Interest and other finance charges Rs. 22,19,297 Other-charges Rs. 69,22,455 Sub-total Rs. 1,54,66,540 Net Prior Period Charges (Rs. 1,54,66,540 Rs. 42,27,754) Rs. 1,12,38,786 In this context, the appellant s arguments is that after adjusting the net prior period charges, the purchase cost of power is Rs. 1002,45,95,693 which has been transferred to APTRANSCO as power purchase cost. It was argued that after considering the cost of purchase of power by the APTRANSCO at the balancing amount of Rs. 1002,45,95,693 the income of the appellant company has been adopted at Nil. It was further submitted that the said amount of net prior period charges relates to the period prior to incorporation of the appellant company. These arguments of the appellant company prima-facie appear to be misconceived. Perusal of the profit loss account of the appellant company reveal that after debiting the purchase cost of power of Rs. 1002,45,95,693 the excess of income over expenditure is Rs. 1,12,38,786. This clearly represents the net profit of the appellant company as on 31/03/2001. Therefore, the purchase cost o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be seen from the above this decision was taken much after the closure of the Annual Accounts which closed on 31/03/2001. Therefore, though the appellant company earned a profit for the accounting year ending on 31/03/2001, the same was nullified by the above decision which was communicated on 17/10/2002. This brings in the question whether such treatment of profit is an application of income or a diversion of income by overriding title. 4.3. An obligation to apply the income in a particular way before it is received by the assessee or before it has accrued or arisen to the assessee results in the diversion of the income. On the other hand, an obligation to apply income which has accrued or arisen or has been received amounts merely to the apportionment of the income and not to its diversion. In order to decide whether a particular disbursement amounts to diversion or application of income, the true test is to probe into, and decide whether the amount sought to be deducted, in truth, did not or did reach the assessee as his own income. In every case there are obligations, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of the same item of expenditure claim. If the assessee has acted only as an agent, then there is no requirement of preparing a "Revenue Account" declaring both purchases and sales. Since the assessee company has been incorporated only on 30.3.2000, there cannot be any question of "Prior year" and consequently any "Prior period charges/claim". Another claim of the assessee is that the said amount is to be treated as "Additional purchase cost", but the said claim goes against the entries passed in the books of account, i.e. in the books it was claimed as "Net prior period charges/credits". The Assessing Officer as well as the Learned CIT(A) has rejected the claim of additional purchase cost by holding that the same is an application of income. In view of the above, we are also of the view that the claim of Rs. 1,12,38,786 has to be disallowed as the assessee could not give a legally tenable explanation in this regard. Accordingly we affirm the decision of Learned CIT(A) on this issue. 5.1. The next issue in the computation under normal provisions of the Act relates to the disallowance of Rs. 9,08,06,966 pertaining to the provision made towards terminal benefits of emplo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Learned CIT(A) on this issue and accordingly uphold the same. 6. Now we take up the issues raised in connection with the computation of book profit made under section 115JB of the Act. The assessee has also taken a ground that the Learned CIT(A) should have directed the Assessing Officer to prepare the Profit and Loss account in accordance with Parts II and III of Schedule VI of the Companies Act, since the accounts of the assessee had been prepared in accordance with "Electricity (Supply) (Annual Accounts) Rules. This issue has been considered by the Hyderabad bench of Hon'ble ITAT in the case of Dy. CIT v. Northern Power Distribution Co. of AP Ltd., in ITA Nos. 239 240/Hyd/2006 and the Tribunal, vide its order dated 06-06-2008 has decided this issue against the assessee. We extract below the relevant observations made and the decision rendered by the Tribunal in the abovecited case. "6. We have duly considered the rival contentions and the material on record section 115JB(1) mandates that in the case of an assessee which is a company, if the total income as computed under the Act is less than 10% of its book profit, such book profit shall be deemed to be the total income o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be considered for the purposes of section 115JB of the Act. As stated earlier, the assessee has declared NIL profit after claiming an amount of Rs. 1,12,38,786 under the head "Net Prior year charges/credits". However, the Assessing Officer took the view that the net profit should be taken as Rs. 1,12,38,786. The said view was also confirmed by Learned CIT(A). 7.1. The Learned A.R, by placing reliance on the decision rendered by the Hyderabad bench of Hon'ble ITAT in the case of Northern Power Distribution Co. of AP Ltd, (supra), contended that the Assessing Officer is not entitled to make adjustments to book profit shown in the audited accounts. Learned A.R drew our attention to the following observations made in the above-cited case. "7. In this preceding paragraph, we have held that the revenue account prepared by the assessee is to be taken as the profit and loss account for the purpose of section 115JB of the Act. Now the question is what is the book profit as per the said account?. The revenue account on page 29 of the annual accounts show Nil" surplus/deficit. This has been arrived at after adjusting expenditure charges of Rs. 232.90 lakhs against the profit of the lik ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollo Tyres (supra). The said decision of the apex court was considered by this bench in the case of Hindustan Shipyard Ltd. v. Dy. CIT (6 ITR (Trib.) 407) and we extract below the relevant observations made by the Tribunal in that case. 8.2. The next question that arises before us is whether the AO is entitled to go beyond the net profit/loss that was disclosed in the annual accounts prepared under the Companies Act in this kind of situation. The assessee has placed its reliance heavily on the decision of the Hon ble Supreme Court in the case of Apollo Tyres Ltd., (supra). We have carefully perused the said decision. We extract the following observations of Hon ble Supreme Court in that case : "Sub-section (1A) of section 115J does not empower the AO to embark upon a fresh inquiry in regard to the entries made in the books of account of the company. The said sub-section, as a matter of fact, mandates the company to maintain its account in accordance with the requirements of the Companies Act which mandate, according to us, is bodily lifted from the Companies Act into the IT Act for the limited purpose of making the said account so maintained as a basis for computing the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been laid down that the accounts of a company must give true and fair view of the profit of the company. Provisions of Part II of Schedule VI to the Companies Act also laid down that the profit and loss account of a company shall be so made out as to disclose clearly the results of the working of the company during the period covered by the account. The provisions of Part II and Part III of Schedule VI are therefore, subservient to the basic requirement true and fair view of the profits of the company. The judgment in the case of Appollo Tyres Ltd. laid down that the Assessing Officer cannot dispute the accounts maintained in accordance with the Provisions of Part II and Part III of Schedule VI of the Companies Act. Thus, the power of the Assessing Officer to decide whether or not the accounts were prepared in accordance with Part II and Part III of Schedule VI to Companies Act has not been affected by the judgment. Therefore, in case the Assessing Officer found the profit and loss account has not been prepared in accordance with the provisions of Part II and Part III of Schedule VI to the Companies Act and also that the profit and loss account prepared by the assessee is fraudu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or documents." "3. The profit and loss account shall set out the various items relating to the income and expenditure of the company arranged under the most convenient heads and in particular, shall disclose the following information in respect of the period covered by the account. (iv) The amount provided for depreciation, renewals or diminution in value of fixed assets. If such provision is not made by means of a depreciation computed in accordance with section 205(2) of the Act shall be disclosed by way of a note". After considering these two provisions the Hon ble Delhi High Court has observed as under: "4.7 Thus disclosure, according to us, in the notes to the account is obligatory by virtue of the provision of sub-section (1A) of section 115J of the Act which requires that every assessee shall prepare P L a/c in accordance with the provision of Parts II and III of Schedule VI of the Companies Act, 1956. 4.8. Having said that, the issue still remains as to whether notes to accounts form part of the accounts, and whether the fact that the current year depreciation which has not been debited to the P L a/c would in any way deprive the assessee of its claim for the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If any company deviates from the prescribed accounting standards, it has to disclose, inter alia, the financial effect arising due to such deviation. Thus there is an option for the companies not to follow the accounting standards, if it feels so for any reason. Such deviation may have impact to the profit disclosed in the profit and loss account prepared in accordance with the Part II and Part III of Schedule VI of the Companies Act. Hence, in order to enable any body to understand the implication of such deviation, it was made mandatory for the companies to disclose the financial implications of such deviation. 7.7. Such kind of deviations are acceptable under the Companies Act, however they are not always acceptable to the income tax authorities. Under the income tax, the Assessing Officer is entitled to examine the said deviations, particularly when it has an impact on the Book Profit. Taking such a view only, it was held in the case of Sain Processing Weavings (supra) and Hindustan Shipyard Ltd. (supra) that the Assessing Officer shall be entitled to adjust the Book Profit with the financial implications of such kind of deviations for the purposes of section 115J/115JA. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 1,12,38,786 represents "Net prior period charges". Since the assessee has been incorporated only on 30-3-2000 and the instant year is the first year of operation, there cannot be any claim relating to the "Prior Period". The "Accounting name" assigned to the above-said claim goes against the facts prevailing in the case of the assessee. (c) The said amount represents additional purchase cost. In this regard reliance was placed on the letter dated 17.10.2002 issued by the Director (Finance) of APTRANSCO to the assessee. However, it could be seen that the annual accounts have been certified on 07.06.2003, i.e. subsequent to the date of above cited letter. Even though the accounts have been prepared subsequent to the date of the said letter, yet the assessee company has treated the net profit as "Net prior period charges" instead of adding the same to the "Purchase cost". Hence the sanctity of the above-said letter becomes doubtful. We have sustained the addition of the above-said claim while computing the income under normal provisions of the Act, since the assessee could not give a legally tenable explanation in respect of the said claim. 7.10. From the contradictory e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted for a known liability, a reserve is created to take care of any unforeseen events. It is a well settled proposition of law that one should not be carried away by the "Nomenclature" given to a particular item/transaction. 8.2. It is not in dispute that, in the instant case, the impugned amount of Rs. 9.08 crores has been appropriated towards the terminal benefits of the employees of the assessee company viz., graturity and pension payable, on the basis of actuarial valuation. In the following cases it has been held that such kind of provision falls under the category of "Ascertained liability" : (a) CIT v. Ilpea Paramount (P.) Ltd. [2010] 233 CTR (Delhi) 545 (b) CIT v. National Hydro Electric Power Corporation Ltd. [2010] 45 DTR (P. H.) 117) In both the cases it has been held that the provision made for gratuity is an ascertained liability and hence the same is deductible while computing book profit under section 115JA/115JB. In the second mentioned case, it has been held that the provision made for leave encashment, post-retirement medical benefit are also ascertained liabilities, which are deductible under section 115JB from the book profits. In the instant cas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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