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TMI Blog2018 (5) TMI 498X X X X Extracts X X X X X X X X Extracts X X X X ..... ereafter 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 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v) Provision for non-moving and obsolete stock, since the same were not taken into account for arriving at the book profit Rs.4,32,02,259 3. Aggrieved by the above additions to the book profit disclosed by the assessee, the assessee preferred an appeal before the CIT (A). The CIT (A) granted partial relief to the assessee by deleting the addition of the provision of taxation (Fringe Benefit Tax) and provision for leave encashment and also addition of ₹ 60,90,62,390 being the sum of the income from capital contributions credited to P L A/c and income from RGGVY subsidy credited to P L A/c treating the same as a capital receipt. Aggrieved by the relief granted by the CIT (A), the Revenue is in appeal before us, while the assessee is in appeal against the confirmation of the additions by the CIT (A). Let us first deal with the assessee s appeal. The assessee has raised the following grounds of appeal: 1) The order of the Learned Commissioner (Appeals) is contrary to the facts and the law on the subject with reference to certain additions made by the assessing officer. 2) The Learned Commissioner (Appeals) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndard-5 is only partially correct. Against the order of the CIT (A), the assessee is in appeal before us. 5. The learned Counsel for the assessee, while reiterating the submissions made by the assessee before the authorities below, has drawn our attention to the Accounting Standard-5 which clearly lays down that the extra ordinary items such as prior period expenses are to be shown after arriving at the net profit of the year. He has also drawn our attention to the computation of the income u/s 115JB of the Act wherein the net profit as per the books of account as per the P L A/c was ₹ 10,97,69,983, to which, the provision for Income Tax of ₹ 1,56,36,507 and depreciation of ₹ 224,31,94,166 were added and thereafter the depreciation of ₹ 224,31,94,166 debited to the P L A/c was reduced and the book profit as per section 115JB was arrived at a sum of ₹ 12,54,06,490. He also drew our attention to Page 1 of the Paper book filed by the assessee which is the computation of the total income for the previous year ending i.e. 31.03.2009 wherein the net profit as per the P L A/c was taken at ₹ 10,97,69,983 and the book profit as per section 115JB of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... afatlal Micron Ltd vs. Income Tax Officer in ITA No.1083/Ahd/2007, dated 7.12.2006. 7. Having regard to the rival contentions and the material on record, we find that while computing the income u/s 115JB of the Act, the book profit as per the P L A/c is to be considered to which the adjustments under the Explanation are to be made. From the P L A/c placed at page 38 of the Paper Book filed by the assessee, the net profit after tax for the year is ₹ 18,67,08,728 and after reducing the prior period expenses of ₹ 7,69,38,745, the net figure of ₹ 10,97,69,983 has been arrived at. Though the assessee had contended that these expenses have crystallized during the relevant financial year, nothing has been brought on record to prove the same. From the computation of income u/s 115JB of the Act, we find that the assessee has reduced the prior period expenses before arriving at the net profit of ₹ 10,97,69,983/-. In fact, it has made below the line adjustment of the prior period expenses as per AS-5. The Hon'ble Supreme Court, in the case of Apollo Tyres vs. CIT (cited Supra), has held that u/s 115JB, the jurisdiction of the AO is limited to examine whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... beyond the book profit, in the decision in Apollo Tyres Ltd. (supra) the Apex Court pointed out to the objects of the introduction of the said provision of Section 115J with a deeming provision which makes the company liable to pay tax on at least 30 percent of its book profits as shown in its own account. The Apex Court pointed out that Sub-section (1A) of Section 115J does not empower the Assessing Officer to embark upon a fresh inquiry with regard to the entries made in the books of account of the company. The said sub-section mandates the company to maintain its account in accordance with the requirements of the Companies Act for the limited purpose to find out whether the computation is done in accordance with the provisions of the Companies Act. The Assessing Authority has a limited jurisdiction to satisfy himself that the accounts are maintained in accordance with the provisions of the Companies Act. Beyond that, the Assessing Authority has no jurisdiction to go further into accounts. The Apex Court further held as follows:- ............. If the statute mandates that income prepared in accordance with the Companies Act shall be deemed income for the purpose of Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the prior period expenses on the ground that such expenses did not find mention in any of the clauses (i) to (ix) of the Explanation to Section 115JA(2). Dealing with such contention, the Delhi High Court pointed out that to the Accounting Standard (AS-5) and stated that Accounting Standards clearly stipulates that prior period items are income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statement of one or more prior periods. Referring to paragraph 7 of AS 5, the Delhi High Court pointed out that the net profit or loss comprises of extraordinary items and the same should be disclosed on the face of the statement of profit and loss. The Delhi High Court further held as follows:- ............... From this, it is clear that both, prior period items as well as extraordinary items are to be included in the determination of net profit or loss. If a prior item is an expense, it is obvious that it will go towards reducing the net profit or increasing the loss, as the case may be. On the other hand, if the prior period item is an income, it would go towards increasing the net profit or reducing the loss, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 342 ITR 250 (Mad.), wherein in preference to the decision of the Delhi High Court in Khaitan Chemicals Fertilizers Ltd. (supra) , this Court applied the decision of the Kerala High Court in Sree Bhagawathy Textiles Ltd. v. Asstt. CIT [2012] 342 ITR 244 (Ker.), on the facts available that it was more about appropriation account. In considering the nature of the expenses charged on the appropriation account, this Court held that the assessee was not entitled to have the deduction of amounts debited in the profit and loss appropriation account in the computation of the net profit. As such, the decision of this Court Swamiji Mills Ltd. (supra) has no application to the facts of the case herein and it is totally distinguishable. 16. Thus, going by the decision of the Apex Court in Apollo Tyres Ltd. (supra) and applying the facts thus found that in computing the net profit the assessee had adjusted prior period expenses, rightly, the assessee offered the book profit for assessment. No exception could be taken to the course adopted by the assessee in adjusting the prior period expenses in computing the net profit. In the light of the law declared by the Apex Court as to the ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 115JB, any provision leading to diminution in the value of any asset, has to be added to the book profit. The fact is that the assessee has debited the provision for bad and doubtful debts to the P L A/c and therefore, it has to be added back to the book profit while making the computation of tax payable u/s 115JB of the Act. What the assessee is now seeking is to reduce the book profit by the actual bad debts written off as it has debited the said amount to the provision for bad and doubtful debts A/c and not the profit and loss account. Whether such an adjustment is permissible is to be seen. The Legislature has provided that for computing the income u/s 115JB of the Act, the book profit means the net profit as shown in the P L A/c for the relevant previous year prepared under sub-section (2) and as increased by the items in clauses (a) to (k) under Explanation (1) to section 115JB and thereafter reduced by the items under clauses (i) to (viii) there under. The bad debts written off is not an item under the Explanation (1) to section 115JB of the Act. The assessee s contentions that the bad debts written off is more than the provision made during the relevant year and theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted the orders of the authorities below. 14. Having regard to the rival contentions and the material on record, we find that the inventory of the current assets is in schedule 7 and the non-moving and obsolete stock has been reduced from the stores and spares (as valued and certified by Management). The difference between the provision as on 31.3.2008 and 31.3.2009 is the sum of ₹ 4.32 crores. However, we find that though it is mentioned as a provision, it has not been debited to the P L A/c but is a Balance Sheet item. We find that the CIT (A) also has agreed with the contention of the assessee that it is an ascertained liability, but merely because of the nomenclature given as a provision, he had confirmed the addition. We are of the opinion 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions from consumers, will be depreciated as per rates specified under GO No.265 (FE) dt.27.3.1994. The depreciation is debited to P L account every year and the same is recognized as income and credited to P L Account, by reducing it from the amount of capital fund received, to reduce the depreciation charged to P L account on the assets purchased out of consumer contribution. For easy explanation the appellant has given the details of entries passed in its books pertaining to the receipts from consumers. The appellant has stated that the contributions received from consumers are capital contributions and should not be treated as income. From the accounting entries passed by it, the appellant has stated that, it can be observed that the capital contributions which has part funded the fixed assets of the company, are adjusted to the cost of fixed assets and also the depreciation originally charged on the fixed assets are reversed, thereby the assets are shown at net values in the books of account and there is no impact on the P L account, as the capital contributions are not on the revenue account and the depreciation originally charged attributable to the cost of assets par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... portion of the cost, if any, as has been met directly or indirectly by any other person or authority. Explanation 10 states that, where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly, by the Central Government or State Government, or any authority established under any law, or by any other person, in the form of a subsidy or grant or reimbursement, then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee. Provided, that where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost of the asset to the assessee. The appellant has gone on to state that the Assessing Officer has misunderstood the accounting policy and accounting entries passed in the books and erroneously treated the capital contributions r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epreciation on the value of assets created out of consumers contributions, as well as out of subsidy received under RGGVY, the depreciation relating to assets credited out such contribution/subsidy was credited to the P L account under the head 'other income'. As a result, in the books of account of the appellant, gross depreciation was debited and deprecation on assets created out of consumer contributions and RGGVY subsidy was credited to the P L account under the head other incomes . In the next stage the appellant while computing its taxable income under the Income tax Act has deleted both the items from the net profit as per the books, by adding gross depreciation and reducing the depreciation attributable to consumers contribution/subsidy. The appellant has then claimed depreciation allowable under the Income tax Act on the net value of assets. The net value of assets is the gross value as reduced by consumers contributions/subsidy as is required under. explanation-l0 to sec.43(1). It is logical that adjustments are made to net profit for entries in the P L account towards depreciation, before allowing deductions towards depreciation as per the I.T.Act. In the normal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Therefore, we see no reason to interfere with the order of the CIT (A) on this issue also. 20. In the result, Revenue s appeal is dismissed. 21. To sum up, assessee s appeal is partly allowed and Revenue s appeal is dismissed. Order pronounced in the Open Court on 30th June, 2017. ( S.Rifaur Rahman) Sd/- Accountant Member ( P. Madhavi Devi) Judicial Member Hyderabad, dated 30th June, 2017. Vinodan/sps ORDER PER S. RIFAUR RAHMAN, A.M.: I have carefully perused the order proposed by Ld. Judicial Member. Though I am in agreement with the findings and conclusion of Ld. Judicial Member relating to ground Nos. 1, 2, 3 5, I have certain reservations, with great respect, in respect of Ground No. 4 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B/d 72,65,00,000 During the year 2008-09 By provision for bad debts 22,89,02,937 To Balance c/d 70,11,00,000 During the year Total 95,54,02,937 Total 95,54,02,937 Write off doubtful debts account (GL A/c No. 79.410 (Profit Loss A/c GL) Balance Sheet GL By provision for bad debts (transferred to provision for bad To Sundry debtors (23.000) 25,43,02,937 debts GL A/c 23.900) 25,43,02,937 Total 25,43,02,937 Total 25,43,02,937 3. The intention of the statute u/s 115JB is to determine the actual book p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... along with the conditional statement, which is other than ascertained liabilities. In the given case, the actual loss/liabilities are already ascertained by the assessee and the actual loss/liability has to be adjusted to arrive at the actual book profit. In the given case, the actual book profit has to be arrived as below: Book profit as per P L A/c xxxxx Add: Unascertained book debts 22.89 xxxxx Less: Actual loss having impact on book profit 25.43 xxxxx By considering the above discussion, in my opinion, the ground raised by the assessee is allowed. 6. With regard to the revenue appeal, I am in agreement with the findings of the Ld. Judicial Member. Dt.: 04/07/2017 Sd/- ( S.RIFAUR RAHMAN) ACCOUNTANT MEMBER Per: D. Manmohan, Vice-President (As Third Member) ORDER UNDER SECTION 255(4) OF THE I. T. ACT, 1961 1. On account of conflict of opinion expressed by the Learned Judicial Member ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. On an appeal filed before the Appellate Tribunal, Learned Judicial Member was of the opinion that the view taken by the Tax Authorities is proper inasmuch as the Tax Authorities are not entitled to question book profit as reflected in the Profit Loss Account maintained under Companies Act. The provision refers to the book profit as arrived at in the books maintained for Company Law purpose and it only speaks of addition to the said book profit referable to provision for bad debts, which is unascertained liability. 6. Learned Judicial Member observed that the assessee is seeking reduction from the book profit by the actual bad debts written off but, such adjustment is not permissible since the Legislature has earmarked the book profit and the amounts which are to be added back or reduced from such book profit . The bad debts written of is not an item falling under Explanation-1 to section 115JB of the Act and hence the question of reducing the same does not arise merely on the ground that the bad debts written off is more than the provision made during the relevant year. It was also noticed that the assessee has prepared its Profit Loss Account in accordance wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat only the net doubtful debts can be carried forward to next year. The Learned Accountant Member tabulated the figures pertaining to the provision account from A.Ys 2006-07 to 2011-12 to emphasise that in the year under consideration there was ascertained liability to the extent of ₹ 25.43 Crs and the same ought to have been taken into consideration to arrive at book profit. No doubt, as per clause c' of Explanation-1 to section 115JB of the Act, the unascertained liabilities have to be added back to the book profit but it makes an exception to the ascertained loss, even though it is not charged to the Profit Loss Account; so long as it has impact on the profits / liability of the company then it has to be adjusted against the book profit. 9. He also observed that the assessee has not charged to the Profit Loss Account the actual loss suffered because the assessee was regularly following the method of accounting as per which provision is created every year and charged to Profit Loss Account. As per the computation of total income for the previous year ending on 31.03.2009, the provision for doubtful debts was added to the net profit but thereafter actual bad d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit. In a nutshell the case of the Learned Counsel for the Assessee is that though for the Company Law purposes the book profit was already determined but while taking into consideration the net income tax, the book profit has to be modified suitably by taking into consideration the actual loss suffered. In fact A.O. could have suo moto done this. He relied upon the decision of the Hon ble Supreme Court in the case of TRF Limited (323 ITR 397) to submit that it is not necessary for the assessee to establish that the debt in fact has become irrecoverable and thus the A.O should not have gone by nomenclature given to the actual bad debts written off and the mistake has occurred only because of the different accounting treatment given to the provision for doubtful debts as well as the actual bad debts. He thus strongly supported the order passed by the Learned Accountant Member. 11. On the other hand, Learned Departmental Representative submitted that section 115JB of the Act was mainly meant to rope in Zero Tax companies. In other words, section 115JB applies to loss making companies and Income Tax Act provides for accounting method to be followed while computing the book prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these circumstances, it cannot be said that the Learned Judicial Member has gone beyond the Profit Loss Account prescribed in section 115JB of the Act. Learned Departmental Representative has also relied upon the decision of the Hon ble Supreme Court in the case of Apollo Tyres (supra) to contend that the Assessing Officer / Tax Authorities cannot question the book profit , arrived at on the basis of books maintained for Company Law purposes, duly audited, and it has limited power of either increasing the book profit or reduction of book profit so arrived at, by applying the provisions of section 115JB of the Act. Certainly, in the instant case, diminution in the value of recoverables do not fall for consideration under any of the provisions referred in section 115JB of the Act. He thus strongly supported the order passed by the Judicial Member. 14. Joining the issue, Learned Counsel for the Assessee submitted that the assessee-company has not followed actual loss method on account of which there was a difference in claim but the fact remains that there was actual bad debt which was an ascertained liability which ought to have been reduced from the book profit or at least the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7/- the assessee has written off only to the tune of ₹ 22,89,02,937/- which is an ascertained liability and thus the same cannot be taken into consideration. In fact Schedule-14, annexed to the Profit Loss Account, prepared for Company Law purposes, indicate that the assessee clearly mentioned it as bad and doubtful debts written off. There is no dispute with regard to the fact that the Tax Authorities have not stated anywhere that the liability to the tune of ₹ 25,43,02,937/- is not an ascertained liability. If the assessee has claimed lesser than the ascertained liability, it cannot be assumed that it is a provision merely because of a different accounting method followed by the assessee. I am therefore of the opinion that the view taken by the Learned Judicial Member is not in accordance with law. At the same time, the view taken by the Learned Accountant Member also deserves to be modified in view of the fact that the grounds of appeal is restricted to disallowance of ₹ 22.89 Crs only. Therefore there is no claim with regard to the allowance of ₹ 25,43,02,937/- either in the grounds of appeal or Schedule-14. As rightly pointed out by the Learned Depart ..... X X X X Extracts X X X X X X X X Extracts X X X X
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