Kerala H.C : Whether prior period expense is not an item that can be deducted from profit in terms of any of clauses covered by Explanation to section 115JA and, therefore, same cannot be allowed as deduction in MAT assessment

High Court Of Kerala

Sree Bhagawathy Textiles Ltd. vs. ACIT

Assessment Year : 1997-98

Section : 115JA

C.N. Ramachandran Nair And Harun-Ul-Rashid, JJ.

IT Appeal No. 74 Of 2010

March 3, 2011

JUDGMENT

C.N. Ramachandran Nair, J. – Appeal by the assessee is against the order of the Tribunal issued under section 154 of the Income-tax Act (hereinafter called “the Act”) rectifying and reversing an order in appeal that was decided in favour of the appellant-assessee. We have heard Adv. Sri. R. Vijaya Raghavan appearing for the appellant-assessee and Standing Counsel for the respondent-revenue.

2. The assessment involved is for the year 1997-98. The Assessing Officer accepted the loss return submitted by the assessee and, therefore, proceeded to make MAT assessment on 30 per cent of the book profit under section 115JA of the Act. The assessee disclosed a book profit of Rs. 78,43,643 and accepting the same the Assessing Officer completed the assessment on 30 per cent of the book profit i.e., fixing the income at Rs. 23,53,093. However, later the Assessing Officer noticed that the Profit and Loss Account prepared by the assessee under Parts II and III of Schedule VI of the Companies Act disclosed a profit of Rs. 1,01,37,664, wherefrom the assessee had made a deduction of Rs. 23,29,726 towards prior period expenses which is impermissible under the statute and this mistake was rectified in proceedings initiated under section 154 of the Act by disallowing deduction claimed by the assessee from the profit available under the Profit and Loss Account above referred. The assessee challenged the rectification order before the first appellate authority namely, the Commissioner of Income-tax (Appeals). However, the CIT (Appeals) verified the Profit and Loss Account prepared under Parts II and III of Schedule VI of the Companies Act and noticed that the profit available in the said Profit and Loss Account was Rs. 1,01,37,664. The debit made towards prior period expenses was not in the Profit and Loss Account prepared under the Companies Act as stated above but the deduction was shown in the Profit and Loss Appropriation Account which is not relevant for the purpose of assessment under section 115JA of the Act. Even though assessee relied on decision of the Supreme Court in Apollo Tyres Ltd. v. CIT [2002] 255 ITR 2731, the CIT (Appeals) held that assessee has claimed a deduction from the profit available in the Profit and Loss Account prepared under the above provisions of the Companies Act which is not authorised under clauses (i) to (ix ) of Explanation to section 115JA of the Act. Therefore, he held that the mistake in the original assessment which is a patent deviation from the statutory provision is a mistake apparent which could be corrected under section 154. When the assessee filed second appeal, Tribunal initially allowed the same without considering the case on merits, but by holding that admissibility of item of expenditure towards deduction in the computation of book profit under section 115JA is a debatable point on which no rectification can be made under section 154 of the Act. The appeal filed by the assessee was accordingly allowed by the Tribunal. However, department filed a rectification application pointing out the scheme of assessment under section 115JA to the Tribunal wherein the basis to be adopted is the profit as shown in the Profit and Loss Account prepared under the above provisions of the Companies Act and therefrom the adjustments permissible are limited to the nine items provided in clauses (i) to (ix) of Explanation to section 115JA. The Tribunal after verifying the facts found that the assessee has returned the book profit not based on Profit and Loss Account prepared under the Companies Act, but based on the profit available under the Profit and Loss Appropriation Account which is against section 115JA of the Act and, therefore, the Tribunal rectified their earlier order and upheld the order of the CIT (Appeals) confirming the rectification order passed by the Assessing Officer under section 154 of the Act. It is against this order of the Tribunal, passed under section 154 the assessee has filed the appeal.

3. There is no dispute on the factual position inasmuch as the profit available as per Profit and Loss Account prepared by the assessee in terms of Parts II and III of Schedule VI of the Companies Act based on which assessment under section 115JA has to be made was Rs. 1,01,37,664. The only question to be considered is whether assessee is entitled to deduction of prior period expenditure which is ex gratia payments made to employees for the services rendered for the last several years which is a debit made by the assessee under the Profit and Loss Appropriation Account and if the same was wrongly allowed based on assessee’s claim, the Assessing Officer could rectify the same in proceedings initiated under section 154 of the Act. Counsel for the assessee relied on several decisions including that of the Supreme Court in Apollo Tyres Ltd.’s case (supra). The other decisions relied on by the assessee’s counsel are that of Delhi High Court in CIT v. Khaitan Chemicals & Fertilizers Ltd. [2008] 307 ITR 1501, that of Madras High Court in CIT v. Inden Biselers [1990] 181 ITR 692 and decisions of the Supreme Court in TRF Ltd. v. CIT [2010] 323 ITR 397 and in CIT v. HCL Comnet Systems & Services Ltd. [2008] 305 ITR 4093. Standing Counsel appearing for the Revenue on the other hand contended that section 115JA is a self-contained scheme of assessment and the basis for assessment is the Profit and Loss Account prepared under the above referred provisions of the Companies Act.

4. After hearing both sides and after going through the judgments above referred, we are unable to uphold the assessee’s contention because what the Supreme Court has held in Apollo Tyres Ltd.’s case (supra) is that the Assessing Officer is bound to accept the Profit and Loss Account prepared in terms of the above provisions of the Companies Act. The assessee also does not dispute the fact that the profit available under the Profit and Loss Account prepared under the Companies Act is Rs. 1,01,37,664. However, the assessee’s contention is that the debit of prior period expenses made in the Profit and Loss Appropriation Account should also be allowed as a deduction. We are unable to accept this contention because MAT assessment has to be completed strictly in terms of the statutory provision which is as follows :

“115JA. Deemed income relating to certain companies.—(1) Notwithstanding anything contained in any other provisions of this Act, where in the case of an assessee, being a company, 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, 1997 (hereafter in this section referred to as the relevant previous year) is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit.

(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);

Explanation.—For the purposes of this section, “book profit” means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by—

(a) **

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 reserves or provisions if any such amount is credited to the profit and loss account :

(ii) the amount of income to which any of the provisions of Chapter III applies, if any such amount is credited to the profit and loss account; or

(iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account.

Explanation. —For the purposes of this clause, the loss shall not include depreciation; or

(iv)the amount of profits derived by an industrial undertaking from the business of generation or generation and distribution of power; or

(v)the amount of profits derived by an industrial undertaking located in an industrially backward State or district as referred to in sub-clause (b) or sub-clause (c) of clause (iv ) of sub-section (2) of section 80-IA, for the assessment years such industrial undertaking is eligible to claim a deduction of hundred per cent of the profits and gains under sub-section (5) of section 80-IA; or

(vi)the amount of profits derived by an industrial undertaking from the business of developing, maintining and operating any infrastructure facility as defined under sub-section (12) of section 80-IA, and subject to fulfilling the conditions laid down in sub-section (4A) of section 80-IA, or

(vii)the amount of profits of sick industrial company for the assessment year commencing 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.

Explanation.—For the purposes of this clause, “net worth” shall have the meaning assigned to it in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986).

(viii)the amount of profits, eligible for deduction under section 80HHC, computed under clause (a), (b) or (c ) of sub-section (3) or sub-section (3A), as the case may be, of that section and subject to the conditions specified in sub-sections (4) and (4A) of that section;

(ix)the amount of profits eligible for deduction under section 80HHE, computed under sub-section (3) of that section.”

What is clear from the above is that the Assessing Officer should start with the profit available in the Profit and Loss Account prepared in terms of Parts II and III of Schedule VI of the Companies Act. The profit under the said Profit and Loss Account admittedly is Rs. 1,01,37,664. The way assessee has claimed deduction based on the Profit and Loss Appropriation Account is detailed in the order of the CIT (Appeals). What is clear from the said order is that the assessee made a further deduction from the profit available under Profit and Loss Account prepared under the Companies Act. Obviously unless the deduction made by the assessee is permissible in terms of clauses (i ) to (ix) of Explanation to section 115JA above stated, the same is inadmissible. Assessee has no case that the prior period expenses is an item that could be deducted from the profit in terms of any of the clauses covered by Explanation to section 115JA. So much so, the claim is not a deduction allowable from the profit taken from the Profit and Loss Account prepared under the Companies Act. When the deduction is admittedly not admissible under the provisions of the Act, assessee wants to bank on the technicality that the deduction, though wrongly allowed in the assessment based on the wrong claim made by the assessee, cannot be revised in rectification proceedings under section 154. We are unable to accept this contention because it is the settled position as revealed from the decisions of the Supreme Court relied on by the assessee itself that the Assessing Officer has to start assessment by adopting the profit available in the Profit and Loss Account prepared in terms of Parts II and III of Schedule VI of the Companies Act. If the assessee has made a claim of deduction from this profit not enumerated in the clauses (i) to (ix) covered by Explanation to section 115JA, the assessment so completed based on the profit taken from the Profit and Loss Appropriation Account submitted by the assessee happens to be an apparent mistake which could be rectified in proceedings to be initiated under section 154. The Tribunal having satisfied on the factual mistake committed by the Assessing Officer in the original assessment, rightly upheld the revised assessment issued under section 154 by reversing their earlier order. We, therefore, do not find any merit in the appeal and the same is accordingly dismissed.

[Citation : 342 ITR 244]

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