1. The assessee is in appeal before us against the order of the learned CIT(A) dated 21.9.2005 for assessment year 2002-03.
2. The first issue relates to the computation of book profits under Section 115JB of the Income-tax Act, 1961(the Act). The assessee company is engaged in the manufacture of detonators, industrial explosives and its accessories. It returned total loss of Rs. 34,27,39,176 for the year under consideration. Since the provisions of S.115JB were attracted, the assessee worked out the book profits at Rs. 9,89,95,042. While computing this book profits, it started with the figure of net profit of Rs. 9,78,55,461, which was the profit before taxation, as shown in the Profit & Loss Account. This profit was arrived at after crediting Rs. 3.06-lakhs as write offs/provision and after charging Rs. l09.96-lakhs as additional advisory fee for sale of investments. These two items were classified as extraordinary items in the Profit & Loss Account. The profit before extraordinary items amounted to Rs. 1085.45- lakhs. The Assessing Officer was of the view that the assessee should have taken Rs. 1085.45- lakhs as the base figure for computation of book profits, i.e. according to him, the extraordinary items should have been ignored. The explanation of the assessee was that the amount of Rs. l09.96- lakhs was an expenditure for the company and hence, the book profits had to be determined after reducing all the expenditure. However, the Assessing Officer did not agree with the contention of the assessee and after referring to the provisions of Section 115JB, held that the assessee was not entitled to reduce the amount of Rs. 109.96- lakhs paid towards additional advisory fees.
3. The CIT(A) referred to the judgment of the Supreme Court in the case of Apollo Tyres Ltd. v. CIT 255 ITR 273 in which it was held that the Assessing Officer is not supposed to make any alteration in the book profitss shown in the Profit & Loss Account prepared as per Companies Act. According to him, this option is not available to the assessee also. The CIT(A) observed that the additional advisory fees claimed by the assessee do not fall within the adjustments that can be made to the net profit as per Profit & Loss Account because the expenditure relates to the transaction of earlier year. Accordingly, he confirmed the computation of book profits made by the Assessing Officer.
4. The learned counsel referred to the provisions of Section 115JB.According to him, actually the starting point for computing the book profits should be Rs. 660.81- lakhs which is the final balance, in the Profit & Loss Account. This profit has then to be increased by the items mentioned in Clauses (a) to (f) under Explanation to Section 115JB(2), if they are debited to the Profit & Loss Account. Referring to the Clauses (a) to (f), the learned counsel pointed out that they were ail items which were to be appropriated from the profits and hence, any item which was not an appropriation could not be adjusted.
Besides relying on the judgment in the case of Apollo Tyres Ltd.(supra), the learned counsel relied on the decision of the Nagpur Bench of the Tribunal in the case of Bastar Wood Products Ltd., reported in 78 Taxman 126. Reliance was also placed on the decision of the Hyderabad Bench of the Tribunal in the case of NCS Estates P. Ltd., reported in 125 Taxman 220.
5. The learned Departmental Representative emphatically stated that just as the Assessing Officer does not have the power to tinker with the profit shown in the Profit & Loss Account, the assessee also cannot do so. He referred to the Accounting Standard-5(AS-5), issued by the Institute of Chartered Accountants of India (ICAI) on 'Prior Period and Extraordinary Items'. Our specific attention was drawn to para-9 of the Standard, which is reproduced below- Prior Period Items should be separately disclosed in the current statement of profit & loss together with their nature and amount in a manner that their impact on current profit or loss can be perceived.
It was further submitted that irrespective of the manner in which the accounts are presented, appropriation account was altogether a separate section and the same should not be mixed with the Profit and Loss Account proper. In this connection, our attention was drawn to the meaning given to 'Appropriation Account' by ICAI in its Guidance Note on Terms Used in Financial Statements. The same is reproduced below- An account sometimes included as a separate section of the Profit & Loss Statement showing application of profit towards Dividends, Reserves, etc.
In the nutshell, the argument of the learned Departmental Representative was that the starting point for computing the book profitss should be Rs. 1085.45-lakhs, which was the profit before extraordinary items and taxation.
6. We have duly considered the rival submissions and material on record. Sub-section (2) of Section 115JB provides that every assessee company shall prepare its Profit & Loss Account in accordance with the provisions of Part-II and Part-Ill of Schedule-VI to the Companies Act, 1956. The said Schedule-VI does not make any distinction between Profit & Loss Account and Profit & Loss Appropriation Account. In fact, the Schedule does not speak of the Appropriation Account at all. It is only as a matter of presentation that most of the companies segregate to reflect as to what has been appropriated where out of the profits earned by them. Otherwise, Sub-clauses (a) and (b) of clause (viii) of Note-II in para-3 of Part-II of Schedule-VI specifically provide that the aggregate amounts set aside or proposed to be set aside to reserves should be distinctly shown in the Profit & Loss Account. Similarly, Sub-clause (b) and Sub-clauses (a) and (b) of Clauses (xii) and (xiii) respectively in Note-II of Part-II of Schedule-VI provide that profits or losses in respect of transactions not usually undertaken or undertaken in exceptional circumstances or which are of non-recurring nature should be shown in the Profit & Loss Account. The aggregate amount of dividends paid and proposed are also to be shown in the Profit & Loss Account. The point we are trying to drive home is that all the items which are generally classified in the Appropriation Account are in fact to be included in the Profit & Loss Account prepared as Parts-II and III of Schedule-VI. Therefore, we are in agreement with the argument of the learned counsel that the starting point for computation of book profitss for the purposes of S.115JB should be Rs. 660.81- lakhs which is the final balance in the Profit & Loss Account carried to Balance Sheet. It may also be noted from the above discussion that even extraordinary items have to be debited to the Profit & Loss Account. Having adopted the figure of Rs. 660.81-lakhs as the starting point, the same has to be increased by the items specified in Clauses (a), to (f) and has lo be reduced by the items specified in Clauses (i) to (vii) given in the Explanation. No other adjustment is permitted by law and also as laid down by the Supreme Court in the case of Apollo Tyres (supra). None of the clauses given in the Explanation provide for the increase or decrease of the book profitss by extraordinary items. The reference to AS-5 by the learned Departmental Representative does not in any manner advance the case of the Revenue. It merely says that prior period and extraordinary items should be separately disclosed alongwith their nature so that their impact on the operating results can be perceived. It does not say that they are not part of the Profit & Loss Account. Similarly, the Guidance Note issued by the ICAI also does not help the Revenue as it merely says that sometimes, Appropriation Account is included as a separate section of the Profit & Loss Account. But, as we have seen earlier, Parts-II and III of Schedule-VI to the Companies Act do not speak of Appropriation Account at all. In the light of this discussion, we are convinced that it was in accordance with law for the assessee to have taken Rs. 978.55- lakhs as the base figure to compute the book profits for the purposes of Section 115JB.7. In the next ground, the assessee is aggrieved against the following three additions/disallowances: (a) Addition of Rs. 3,62,005 on account of delayed payment of Provident Fund; (c) Disallowance of Rs. 9,34,455 on account of sales-tax payment under Section 43B of the Act.
8. After hearing the parties, so far as the first item is concerned, it is not disputed that the entire payment was made before the end of the accounting year. Therefore, following the decision of the Special Bench in the case of Kwality Milk Foods Ltd. v. ACIT 100 ITD 199 SB, we delete the addition. As regards the second item, the learned counsel fairly conceded that the CIT(A) was justified in granting depreciation at 25%. Hence, on this issue, the order of the CIT(A) is upheld. With regard to the last item, refund of sales tax which was due to the assessee was adjusted against the amount which was to be paid by the assessee and hence, it was claimed by the assessee that the same should be deemed to have been paid. However, the CIT(A) did not agree with the contention in the absence of any evidence. It is submitted by the learned counsel that during appellate proceedings the assessee did not have the required evidence which is now available, and hence, an opportunity may be given to satisfy the CIT(A). We accept the request of the learned counsel and direct the CIT(A) to consider the evidence and decide the issue afresh after due opportunity of being heard td the assessee.
9. Last ground relates to the levy of interest under S.234A and 234B of the Act. The Assessing Officer is directed to grant consequential relief to the assessee.