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TMI Blog2007 (3) TMI 295X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act, 1961, when the deferred tax is a provision of tax effect of the differences between taxable income and accounting income, and so is not allowable under section 115JB of the Income-tax Act, 1961 in determining book profit under that section. (3) That on the fact and in the circumstances, the ld. CIT(A) erred in directing to allow deferred tax in determining book profit under section 115JB of the Income-tax Act, 1961, when the accumulated provision of deferred tax is reflected in liability side of balance sheet and thus forms a reserve to meet future liability of tax. (4) 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, 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e deferred tax is shown as under:- Depreciation on fixed assets - Rs. 9,321.21 lakhs Less: Expenses allowable for tax purposes when paid - Rs. 882.70 lakhs ------------------ Net deferred tax - Rs. 8,438.51 lakhs ------------------ The net deferred tax at the beginning of the year (i.e. at the end of earlier financial year) was Rs. 7, 156.59 lakhs. The difference of Rs. 8,438.51 lakhs (Net deferred tax of this year) and Rs. 7,156.59 lakhs (Net deferred tax of earlier year) being Rs. 1,281.92 lakhs was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India, deferred tax is an expense, which is required to be deducted by a company while computing the net profit for the year. It was further contended by the assessee that book profit as per section 115JB is to be determined taking into account the net profit i.e. the profit as arrived at after deducting all expenses, taxes, deferred tax, etc. It was contended before the ld. CIT(A) that in computing the book profit, the adjustments, which are required to be made, have been stipulated in Explanation to section 115JB by increasing the amount referred to in clauses (a) to (f) debited to the profit & loss account and as reduced by clauses (i) to (vii) as mentioned in Explanation to section 115JB(2). The assessee has thereafter submitted that the Assessing Officer cannot alternate the book profit by making any addition other than the ones specifically mentioned in the Explanation as mentioned in such Explanation in view of the decision of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273. 3. The assessee also submitted that the specified additions to be made to the net profit to arrive at book profit, within which the deferred tax charge to the P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or doubtful debts is accrued in the books by creating a deferred tax asset though the actual tax benefit would flow through in the tax return when the doubtful debt actually becomes bad. Thus, the deferred tax charge accrues in the same period and is therefore an ascertained liability relating to the same period, though the point of time when tax becomes payable/chargeable/leviable is postponed. Thus the deferred tax amount is in the nature of provision made for meeting ascertained liability. In support of his above contention, the assessee has relied on the decision of the Hon'ble Bombay High Court in the case of CIT v. Echjay Forgings (P.) Ltd. [2001] 116 Taxman 322, wherein it was held that provision for doubtful debt and provision for gratuity based on actuarial valuation represented ascertained liability and hence need not be added back for the purposes of computing book profit under section 115JB. It was submitted by the assessee before the ld. CIT(A) that the differed tax charge is not to be added back as amount set aside to the provisions made for meeting liabilities, which are ascertained. The assessee has also relied on the following judgments in support of his conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ICAI makes it amply clear that this is nothing but accounting for taxes on income. It has further been emphasized by Dr. Sah that Accounting Standard 22 has clearly stipulated the system of recognition of deferred tax liability/assets and has submitted that these should be identified and ascertained with respect to items of timing difference and where tax liability is postponed, an amount equivalent to such tax liability should be set apart by charge on revenue or vice versa. The ld. D.R. for the Revenue relying on AS-22 has submitted that AS-22 provides that deferred tax (assets or liability), which is one of the limbs of expense on tax, should be measured by using the tax rate and tax loss that have been enacted or sustantially enacted at the balance-sheet date and, therefore, the quantification of deferred tax is based on reasonable certainity and not at all at the absolute certainity. Therefore, it makes the provision for deferred tax liability as reasonably unascertained liability. 10. The ld. D.R. has further stated that AS-22 cast an obligation on the company to account for the tax expenses creates two major limbs on this account i.e. current tax and deferred tax. Both of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment prescribed in the section 115JB is over and above the treatment and accounting of different items of the profit & loss account and balance sheet prepared as per the Companies Act and a plain reading of the provisions under section 115JB reveals that this is the minimum tax, which Company requires to cope up if net profit in profit and loss a/c after adjustment 'as per Explanation under section 115JB results into a positive book profit and it has nowhere been stipulated in the provision under section 115JB that accounts prepared in accordance with the Companies Act will not require any adjustment i.e. either addition or deletion. It has been submitted that the provision of Income-tax Act under section 115JB is overriding on the provision of Accounting Standard/Companies Act so far as MAT under section 115JB is concerned. 13. It has, therefore, been submitted by the ld. D.R. that the amount of deferred tax liability debited to the profit & loss a/c was rightly added back by the Assessing Officer while computing the book profit under section 115JB for the reasons that this is not only the unascertained liability but is basically provision for income-tax payable. 14. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 115JB(2) as such deferred tax charge is not an unascertained liabilities, as deferred tax charge is computed scientifically and as per well established and accepted method in guidance of ICAI. It has been pointed out that such scientific method is not only accepted by the accounting professional in India, but being accepted almost globally and since such liabilities are ascertained the same cannot be covered within clause (c) to Explanation below section 115JB(2). 18. It has further been pleaded by the ld. counsel that from the creation of deferred tax charge, the revenue would not be worse off as any withdrawal from the provision for deferred tax liability would be offered for tax in accordance with the provisions of Explanation 1 to section 115JB. It has been argued by the ld. counsel that had this been a case of deferred tax assets, the same would have resulted benefit to the revenue and the revenue cannot allow the assessee for not including such deferred tax assets while computing book profit under section 115JB. 19. The ld. counsel in support of his above submission has relied on the various decisions as already submitted before the ld. CIT(A). He has also relied on the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to be added in Explanation (a) to sub-section (2) of section 115JB or the same should be treated as an amount credit to reserve within the meaning of Explanation (b) to sub-section (2) of section 115JB. The assessee, on the other hand, has contended that deferred tax charge is ascertained liability and the same is created in accordance with AS-22 issued by the ICAI, which is mandatory to be followed by all the assessees and is neither in the form of reserve as stipulated in Explanation (b) to sub-section (2) of section 115JB nor could be treated as income-tax paid or payable within the meaning of Explanation (a) to sub-section (2) of section 115JB, nor the same could be covered under clause (c) of said Explanation as deferred tax charge is certainly an ascertained liability. 21. We after hearing both the parties find that much stress has been given on the adjustment as stipulated in Explanation to sub-section (2) to section 115JB and, therefore, find it convenient to first go through such Explanation which is being reproduced hereunder for the facility of reference:- "For the purposes of this section, 'book profit' means the net profit as shown in the profit and loss a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits eligible for deduction under section 80HHE computed under sub-section (3) or sub-section (3A), as the case may be, of that section, and subject to the conditions specified in that section; or (vi) the amount of profits eligible for deduction under section 80HHF computed under sub-section (3) of that section, and subject to the conditions specified in that section, or (vii) the amount of profits of sick industrial company for the assessment year commencing on and from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986), and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses." Whereas in the instant case, the specified addition could be made to the net profit to arrive book profit as claimed by ld. D.R., in any of three following claims of Explanation to sub-section (2) to section 115JB:- (a) the amount of income- tax paid or payable, and the provision therefore; (b) the amounts carried to any reserves, by whatever, nam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that originate in one period and are capable of reversal in one or more subsequent periods. Timing differences arise because the period in which some items of revenue and expenses are included in taxable income do not coincide with the period in which such items of revenue and expenses are included or considered in arriving at accounting income. For example, machinery purchased for scientific research related to business is fully allowed as deduction in the first year for tax purposes whereas the same would be charged to the statement of profit and loss as depreciation over its useful life. The total depreciation charged on the machinery for accounting purposes and the amount allowed as deduction for tax purposes will ultimately be the same, but periods over which the depreciation is charged and the deduction is allowed will differ. Another example of timing difference is a situation where, for the purpose of computing taxable income, tax laws allow depreciation on the basis of the written down value method, whereas for accounting purposes, straight line method is used." ICAI vide para-9 of AS-22 under the caption 'recognition' has advised that tax expenses for the perio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances should be disclosed in the notes to accounts." 32. The nature of the evidence supporting the recognition of deferred tax assets should be disclosed, if an enterprise has unabsorbed depreciation or carry forward of losses under tax laws." 23. Now we deal with various objections of revenue in deleting the addition made by the Assessing Officer. The first limb of arguments by the revenue is that the deferred tax charge to Profit & Loss A/c is identical to the amount of income-tax paid or payable and, therefore, the same is to be treated at par with clause (a) to the Explanation to sub-section (2) of section 115JB. It has been submitted by the ld. D.R. that the above deferred tax charge is nothing but is in the nature of income-tax, which is liable to be added in view of clause (a) to Explanation to subsection (2) of section 115JB. However, in our considered opinion, such objection raised by the Department is devoid of any merit, as deferred tax means the tax effect of timing difference due to differences between taxable income and accounting income for a period that originate in one period and is capable of reversal and, therefore, such deferred tax charge is a provision for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n be utilized for issuing bonus shares or for declaration of dividend, whereas deferred tax charge cannot be utilised for such purposes. It is also pertinent to note that as per AS-22, deferred tax charge is treated as an expenses of the period in which it is charged, and such expenses cannot be treated as a reserve within the meaning of clause (b) to Explanation to sub-section (2) of section 115JB. Though the ld. DR has argued that such deferred tax liability should be treated at par with other reserve as the same has been debited to the profit & loss a/c and all the conditions stipulated in the provision are fulfilled. However, such contention of the ld. DR could not be accepted keeping in view our observation hereinabove while observing differences between the reserve as stipulated in clause (b) to sub-section (2) of section 115JB and the reserve created for deferred tax liability. The guidelines of ICAI also advice to treat deferred tax charge separately than reserve as stipulated in clause (b) to Explanation to sub-section (2) to section 115JB. We, therefore, dismiss this second limb objection raised by revenue while disputing the order of ld. CIT(A). 25. The 3rd and last lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urdity if provision for deferred tax liability (which is debited to the profit and loss account) is also added back to arrive at the book profit. In fact, there might be financial statements where there is a debit in the profit and loss account for a deferred tax charge (say Rs. 30) and simultaneously there is a credit for deferred tax asset (say Rs. 100). In such a case, the deferred tax asset of Rs. 100 would certainly be taxed. However, if the deferred tax charge of Rs. 30 is added back and also taxed, it would result in a clear-cut absurdity. Since it is a well-settled rule of interpretation that rational construction must prevail over literal interpretation, if later lead to absurd results. We, therefore, are of the view that an interpretation which results in absurdity should be avoided. 27. We, therefore, in view of the above facts and circumstances involved in this case and after perusing material available on record and in the light of above discussion, are of the opinion that deferred tax charge is not covered by any of the clauses of the Explanation to sub-section (2) to section 115JB as objected by the revenue before us, and therefore, in our considered opinion, such d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the order of ld. CIT(A) and has submitted that book profit as per under section 115JB is to be determined taking into account the net profit i.e., the profit as arrived at after deducting all expenses, taxes, deferred tax, etc. Therefore, net profit for the computation of book profit as per section 115JB shall be after deducting the said tax on profit distributed as dividend paid by the company. It has further been contended by the ld. counsel that such payment is not covered under clause (a) to the Explanation of sub-section (2) of section 115JB as tax on profit distributed does not fall within the purview of income-tax paid or payable, as envisaged in the Explanation. It has been submitted that tax on profit distributed as dividend cannot be treated as income-tax due to the fact that income-tax is payable on the income earned by the assessee, whereas tax on dividend is application of income on which income-tax has already been paid. The ld. counsel has thereafter relied on Circular No. 8 by Central Board of Direct Taxes dated 29-8-2005, in which CBDT while dealing with question No. 103 of the Circular has made it clear that fringe benefit tax is an allowable deduction in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (P) Ltd., 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. 36. So far as the action of ld. CIT(A) in deleting the addition following the Circular No. 8, dated 29-8-2005 by CBDT, in our considered opinion, such action of ld. CIT(A) was based on the correct appreciation of the spirit of the Circular. 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 fringe benefit tax and tax on distribution of profit are similar in nature. Since Circular No. 8 dated 29-8-2005 issued by the CBDT makes it clear that fringe benefit tax is an allowable deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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