9911796707
TMI Blog2007 (3) TMI 295X X X X Extracts X X X X X X X X Extracts X X X X ..... nd not provision for income-tax paid or payable and, therefore, could not be covered under Explanation (a) to subsection (2) of section 115JB. We have also noted down the objective behind enacting AS-22 by the ICAI, as deferred tax charge was meant to remove the difference between taxable income and accounting income arising due to difference between items of revenue and expenses as appearing in the statement of Profit Loss A/c and the items which are considered as revenue expenses or deduction for tax purposes or there are difference between the amount in respect of a particular item of revenue or expense as recognized in the statement of profit and loss and the corresponding amount, which is recognised for the computation of taxable income. Therefore, it is absolute apparent that deferred tax charge could not be termed as income-tax paid or payable, which has to be paid out of the profit earned by the assessee for the year under consideration and, therefore, in our considered opinion, the first objection raised by the revenue does not hold any merit. Nature of reserve - Though the ld. DR has argued that such deferred tax liability should be treated at par with other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -tax has already been paid. Furthermore as per sub-section (2) of section 115-O makes it clear that tax on distribution of profit has to be paid by a domestic company even if no income-tax is payable in the year in which dividend is distributed by the company. We have also considered the order of Tribunal, Panaji Bench in the case of Salgaocar Mining India (P) Ltd.[ 2006 (1) TMI 221 - ITAT PANAJI] , wherein interest on income- tax was excluded from the said clause as both were to be treated separately. Since in the present case also, tax on distributed profit is different than income-tax payable, the same cannot be covered under clause (a) to Explanation to sub-section (2) of section 115JB. Fringe benefit tax - HELD THAT:- In our considered opinion on distribution of profit payable as per provision of section 115-O of the Act is of similar nature as fringe benefit tax payable under Chapter XII-H of the Act, since both are payable at the time of incurring certain expenditure which is in the form of fringe benefit given to employees or dividend to shareholders, which are not otherwise taxable under the other provisions of the Act. Therefore, in our considered opinion, both fring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome-tax Act, 1961 on distributed dividend to determine book profit, when the assessee had not filed the claim in the original return, revised return or in the revised computation filed during assessment. (5) That on the fact and in the circumstances, the ld. CIT(A) erred in directing to allow tax paid under section 115-O of the Income-tax Act, 1961 on distributed dividend to determine book profit under section 115JB of the Income-tax Act, 1961 citing CBDT's Circular No. 8 dated 29-8-2005, when the said circular relates to Fringe Benefit Tax, not on tax on dividend. (6) That on the fact and in the circumstances, the ld. CIT(A) erred in directing to allow tax paid under section 115-O of the Income-tax Act, 1961 on distributed dividend to determine book profit under section 115JB of the Income- tax Act, 1961 citing CBDT's Circular No. 8 dated 29-8-2005 without considering the fact that tax on fringe benefit is a charge on business expense and tax on dividend under section 115-O is not a charge on business expense, and, therefore, not allowable to determine book profit under section 115JB of the Income-tax Act, 1961. 2. The first three grounds raised by the Revenue r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered Accountants, the deferred tax is a provision for tax effect of differences between taxable income and accounting income. In the balance sheet, the deferred tax was shown as separate entity as source of assessee business fund. The fund, may be used in future in meeting tax liability of tax. The A/R claimed that, if deferred tax is provision, it was ascertained on scientific basis. So, being ascertained liability it should not be added to the net profit after tax. In this case, the differed tax is set aside to form a liability to meeting future tax which was not determined during the year, the deferred tax cannot be said on ascertained provision. In the assessment order for assessment years 2002-03 and 200304, the deferred taxes were not considered deduction in computation of book profit for MAT under section 115JB. The companies account is to be prepared under Parts II III of Schedule VI of the Companies Act, 1956. As per Rule 3(vi), below, the profit loss account shall set out the amount of charge for Indian Income-tax and other Indian Taxation on Profits, including, where practicable, with Indian Income-tax any taxable imposed elsewhere to the extent of relief, if any, f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 33AC (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities. The assessee has pleaded before the ld. CIT(A) that the amount of income-tax paid or payable and the provision therefore as referred to in clause (a) of Explanation to section 115B clearly refers to current tax liability. Whereas differed tax liability as per Accounting Standard 22 is not required to be added back for the computation of book profit as deferred tax charge is clearly not income-tax paid or payable. Since such different tax is a tax effect of timing differences, which means the differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods and, therefore, the same cannot be considered as a provision for income-tax paid or payable and could not be added back under Explanation (a) to section 115JB. The assessee also placed reliance on the various dictionaries and authority, wherein the terms, income-tax 'paid' or 'payable' are defined. 4. The assessee thereafter has explained regarding the nature of liabilities considering clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmissioner of Inland Revenue v. Mitsubishi Motors New Zealand Ltd. [1996] 222 ITR 697 (PC). The assessee also placed reliance on various dictionaries meaning of the word 'ascertain' before the ld. CIT(A). Apart from the meaning given by International Accounting Standard 12 and Accounting Standard 22 by ICAI. 5. The assessee has pleaded before the ld. CIT(A) that the above provision for deferred tax charge is also not the amount carried to reserve and, therefore, the assessee is outside the ambit of clause (b) of Explanation to section 115JB(2). It has been submitted that a reserve can be created only if the company has profit, however, a deferred tax charge could arise even if the company is making losses. Apart from the fact that a company can unilaterally transfer the reserve back to the profit loss a/c whereas deferred tax charge cannot be so transferred to the profit and loss a/c. The assessee has also pointed out other differences between the reserve and deferred tax charge before the ld. CIT(A). 6. Finally the assessee has submitted before the ld. CIT(A) that any withdrawal from the provision for deferred tax liability would be offered for tax in accordance wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ically provision for income-tax payable arising out of timing difference and, therefore, same is very much within the scope of Explanation to sub-section (2) of section 115JB of the Act and, therefore, deferred tax charge is based on the line of income-tax payable, and is required to be adjusted for arriving at the book profit to be taxed as per section 115JB. 11. The ld. D.R. has thereafter relied on the Explanation (b) below to section 115JB(2), which reads as under:- The book profit means the net profit as shown in the profit and loss account for the relevant previous year under sub-section (2), as increased by- (a) ** (b) The amounts carried to any reserves, by whatever name called (other than a reserve specified under section 33AC) or (c) (d) ** The ld. D.R. has also disputed the contention of the assessee before the ld. CIT(A) that the reserve created by virtue of deferred tax charge is different than reserve as mentioned in Explanation (b) to below section 115JB(2) as such reserve is not distributed reserve and such reserve mayor may not be out of appropriation of surplus profit. It has been submitted by the ld. D.R. that the moot point of consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) after perusing all the relevant clauses as mentioned in clauses (a), (b) (c) to the Explanation below section 115JB has held that provision for deferred tax liability by the assessee was neither unascertained liability nor reserve, which could attract clauses (a), (b) (c) to the Explanation (2) below to section 115JB. 15. The ld. counsel has submitted that provision for deferred tax is not equivalent to a provision for income-tax paid or payable since deferred tax has been defined as the tax effect of timing difference by the ICAI while issuing AS-22. Shri Tulsiyan has thereafter elaborated the objective and scope of issuing AS-22 by ICAI and has submitted that the above Accounting Standard 22 has been made mandatory by ICAI for all entrepreneurs with effect from 1st April, 2002 keeping in view of the necessities of determining the tax liabilities due to time difference. It has been pleaded by the ld. counsel that time differences are the differences between taxable income and accounting income for a period that originate in the one period and are capable of reversal in one or more subsequent periods. Hence, provision for deferred tax is a provision for tax effect of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has also relied on a recent judgment of Panaji Bench of Tribunal in the case of Salgaocar Mining India (P.) Ltd v. Jt. CIT [2006] 287 ITR (AT) 197, wherein it was held that the Income-tax Act maintains a distinction between income-tax and interest as they are statutorily treated in different senses and hence interest cannot be construed to be a part of the income-tax and for this reason, it is not possible to treat interest as part of income-tax and interest on income-tax clearly falls outside the scope of term 'income-tax' as used in Explanation (a) to subsection (2) of section 115JA. It has been submitted by the ld. counsel that in the present case also, deferred tax charge should be considered as different than income-tax paid or payable as the term income-tax paid and deferred tax charges have assumed and acquired separate meaning and are to be understood distinctly and differently from each other. It has, therefore, been submitted by the ld. counsel that it is clear from his submission that the deferred tax charge is not covered by any of the clauses of the Explanation to sub-section (2) to section 115JB and, therefore, is not required to be added back in the computati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b) the amounts carried to any reserves, by whatever name called (other than a reserve specified under section 33AC); or (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities, or (d) the amount by way of provision for losses of subsidiary companies; or (e) the amount or amounts of dividends paid or proposed; or (f) the amount or amounts of expenditure relatable to any income to which section 10 or section 10A or section 10B or section 11 or section 12 apply- If any amount referred to in clauses (a) to (f) is debited to the profit and loss account, and as reduced by- (i) the amount withdrawn from any reserve or provision (excluding a reserve created before the 1st day of April, 1997 (otherwise than by way of a debit to the profit and loss account), if any such amount is credited to the profit and loss account: Provided that where this section is applicable to an appellant in any previous year, the amount withdrawn from 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g liabilities, other than ascertained liabilities. Apart from the above provision of Explanation to sub-section (2) of section 115JB, both the parties have relied on the various provisions laid down under Accounting Standard 22 issued by the Institute of Chartered Accountants of India, which makes it mandatory in respect of all the entrepreneurs to follow such Accounting Standard while preparing their financial statement with effect from 1-4-2002. We, therefore, also find it convenient to deal with the various objectives and scope of such AS-22. 22. The objective and scope for issuing of AS-22 by ICAI are quoted hereunder for the facility of reference:- Objective The objective of this Statement is to prescribe accounting treatment for taxes on income. Taxes on income is one of the significant items in the statement of profit and loss of an enterprise. In accordance with the matching concept, taxes on income are accrued in the same period as the revenue and expenses to which they relate. Matching of such taxes against revenue for a period poses special problems arising from the fact that in a number of cases, taxable income may be significantly different from the account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the period and vide paragraphs 20 to 22, it has laid down the procedure for measurement of such deferred tax charge which reads as under:- Measurement 20. Current tax should be measured at the amount expected to be paid to (recovered from) the taxation authorities, using the applicable tax rates and tax laws. 21. Deferred tax assets and liabilities should be measured using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date. 22. Deferred tax assets and liabilities are usually measured using the tax rates and tax laws that have been enacted. However, certain announcements of tax rates and tax laws by the Government may have the substantive effect of actual enactment. In these circumstances, deferred tax assets and liabilities are measured using such announced tax rate and tax laws. Whereas the presentation and disclosure has been mentioned in paragraphs 27 to 32 of the said Accounting Standard, which is reproduced hereunder:- 27. An enterprise should offset assets and liabilities representing current tax if the enterprise:- (a) has a legally enforceable right to set off the recognized amounts; and (b) int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not provision for income-tax paid or payable and, therefore, could not be covered under Explanation (a) to subsection (2) of section 115JB. We have also noted down that paragraph 30 of AS-22 clearly says that deferred tax assets and liabilities should be distinguished from assets and liabilities representing current tax for the period. Panaji Bench in case of Salgaocar Mining India (P.) Ltd. has also held that interest on income-tax and income-tax paid/payable are to be treated separately as they are separate and distinct from each other. Likewise deferred tax charge cannot be kept at par with income tax paid/payable as both are quite different. Apart from above fact, we have also noted down the objective behind enacting AS-22 by the ICAI, as deferred tax charge was meant to remove the difference between taxable income and accounting income arising due to difference between items of revenue and expenses as appearing in the statement of Profit Loss A/c and the items which are considered as revenue expenses or deduction for tax purposes or there are difference between the amount in respect of a particular item of revenue or expense as recognized in the statement of profit and loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng such deferred tax liability to be covered under clause (c) to Explanation to sub-section (2) of section 115JB contending that such amounts are unascertained liabilities. However, a close perusal of clauses as mentioned in paras 20 to 23 in AS-22 makes it clear that such deferred tax charges are measured scientifically and as per restrict guidelines of ICAI issued time-to-time and are being accepted not only in India but globally. We have also noted down the fact that paras 30 and 31 of AS-22 issued by ICAI (already reproduced elsewhere in the order) make it obligatory on the part of assessee to give break-up of deferred tax liability into major component of the respective balances in its notes of account which makes it clear that such deferred tax charges are being computed on scientific method and as per guidelines issued by the ICAI and the same is not in the nature of contingent liability or are made on estimate basis, which could result into unascertained liabilities. Since in the present case also, the revenue has not disputed the calculation of such deferred tax charge by the assessee which has been made as per guidelines stipulated in AS-22 by ICAI and the computation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck in the computation of book profit for the purpose of section 115JB and, therefore in our considered opinion, the ld. CIT(A) was justified in deleting the addition made by the Assessing Officer in not accepting the claim of the assessee on account of such deferred tax charge. We, therefore, uphold such order of ld. CIT(A) in this regard and reject the ground raised by the revenue. 28. Ground Nos. 4, 5 and 6 by the revenue relate to the order of ld. CIT(A) in directing the Assessing Officer to allow tax paid under section 115-O of the Income-tax Act on distributed dividend to determine book profit. 29. The Assessing Officer in this case has refused to entertain the claim of the assessee that the tax on dividend distributed under section 115-O should be deducted from the net profit for determining book profit for MAT under section 115JB. 30. In appeal, the ld. CIT(A) has allowed such claim of the assessee observing that Circular No. 8 dated 29-8-2005, in which it was held that fringe benefit tax is an allowable deduction in the computation of book profit under section 115JB of the Income-tax Act, and the ld. CIT(A) has agreed with the submission of the assessee before him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 115JB. The ld. counsel for the assessee has submitted that tax on distribution of profit is identical to fringe benefit tax as both are payable at the time of incurring certain expenditure and, therefore, the ld. CIT(A) was justified in deleting the addition made by Assessing Officer following the above Circular. It has, therefore, been pleaded that the order of ld. CIT(A) be upheld in this regard. 34. We have given our careful consideration to the rival submissions made before us and have perused the orders of tax authorities. We have also considered the paper book filed by the ld. counsel for the assessee, written submissions by the ld. DR and the Circular No. 8 dated 29-8-2005 issued by the Central Board of Direct Taxes. The revenue in this case has objected to the claim of the assessee that tax on dividend distributed under section 115-O should be deducted from the net profit for determining book profit under section 115JB. It has been contended by the ld. D.R. that tax on distributed profit could not be treated at par with fringe benefit tax and, therefore, the action of ld. CIT(A) in directing the Assessing Officer to allow such claim is not correct. 35. In this case ..... X X X X Extracts X X X X X X X X Extracts X X X X
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