Vildirect: IncomeTax-caselaws-2011-VIL-923-MAD-DT

2011-VIL-923-MAD-DT

Equivalent Citation: [2012] 342 ITR 250

MADRAS HIGH COURT

18 of 2005

Date: 03.08.2011

COMMISSIONER OF INCOME-TAX

SWAMIJI MILLS LTD.

BENCH

CHITRA VENKATARAMAN MRS., JAICHANDREN M., JJ.

JUDGMENT

Mrs. Chitra Venkataraman J.-

1. The tax case appeal is filed by the Revenue against the common order of the Income-tax Appellate Tribunal, Chennai "C" Bench, dated June 26, 2001, in I. T. A. No. 786 of 1993 relat- ing to the assessment year 1989-90, raising the following substantial ques- tion of law :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that earlier year's bonus is to be deducted from the book profit under section 115J ?"

2. The assessee is a company, whose assessments were taken up for consideration under section 115J of the Income-tax Act (hereinafter referred to as "the Act"). While completing the assessment under section 115J of the Act, the Assessing Officer disallowed the bonus paid to the extent of Rs. 9,59,501, holding that it did not relate to the assessment year under consideration and hence could not be deducted, while arriving at the book profit. Aggrieved by the said order of assessment, the assessee went on appeal before the Commissioner of Income-tax (Appeals).

3. The assessee took the contention that the Assessing Officer should have deducted the bonus paid, viz., Rs. 9,59,501 as well as the donation amount- ing to Rs. 11,151 from the net profit arrived at Rs. 24,85,760, since the donation and the bonus were actual cash outgoings from the current year's profit, 30 per cent. should have been deducted from the net profit. The Commissioner of Income-tax (Appeals) pointed out that the net profit for the purpose of section 115J of the Act was to be computed in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act. Item F1 of sub-clause (x), clause (3) of Part II of Schedule VI to the Com- panies Act shows that apart from wages and salaries, bonus have to be set out in the profit and loss account. So too, the information regarding mis- cellaneous expenses also need to be disclosed therein. Thus, the Commis- sioner of Income-tax (Appeals) held that the donation and the bonus have to be deducted in arriving at the profit under section 115J of the Act. Aggrieved by the same, the Revenue filed an appeal before the Income-tax Appellate Tribunal, questioning the said deduction. As against certain dis- allowance, the assessee also went on appeal before the Income-tax Appel- late Tribunal.

4. By a common order, the Tribunal pointed out that the bonus paid was a liability, which accrued only in the relevant previous year ; hence in com- puting the income under the Income-tax Act, as per the normal compu- tation, this expenditure was considered and given deduction too. However, when the liability had accrued for the first time in the relevant previous year and the same had been exhibited in the relevant previous year with reference to the requirements under Schedule VI to the Companies Act for the purpose of the Income-tax Act, the same cannot be treated as relating to prior period, because, in the prior period, the liability itself had not accrued to the assessee. Thus, the Tribunal agreed with the assessee and dismissed the Revenue appeal. Aggrieved by the same, the Revenue is on appeal before this court.

5. Learned counsel appearing for the Revenue placed heavy reliance on the decision of the apex court in the case of Apollo Tyres Ltd. v. CIT reported in [2002] 255 ITR 273, pointing out that once the net profit is arrived at in terms of Schedule VI to the Companies Act and shows the same at Rs. 24,85,760, the officer cannot go for a further deduction from the said amount. Hence, going by the decision of the apex court, the Assessing Officer should have adhered strictly to the net profit arrived at in terms of the provisions of Schedule VI and in the profit and loss account. Except for making addition and deduction in terms of the Explanation to section 115J of the Act, the claim of the assessee for further deduction of the amount paid by way of bonus to arrive at the net profit is contrary to section 115J of the Act. So long as the net profit shown by the assessee in the profit and loss account stood at Rs. 24,85,760 and a report filed by the company before the statutory authorities also disclosed the net profit at Rs.24,85,760, it stands to reason that the Assessing Officer could only compute on the basis of the what was disclosed therein and he could not go for further deduction.

6. Per contra, learned counsel for the assessee supported the order of the Tribunal. He submitted that the agreement for bonus payment relating to the previous year was entered into only during the relevant previous year. Thus, when the liability itself had accrued only during the relevant previous year, the same could not be termed as payment relating to the earlier year. He submitted that working at the normal computation under the Income- tax Act, this had been treated as expenditure. That being the case, for com- puting the book profit, the same could not be treated differently. The bonus payment and donations were paid from out of the profits of the pre- vious year and not as appropriation and, hence, the same should have been deducted from the net profit. Keeping in with the accounting principles, the officer should have excluded the sum relating to the donations and bonus from out of Rs. 24,85,760 for the purpose of arriving at the book profit at 30 per cent. for the purpose of section 115J of the Act. He further pointed out that the rejection of the assessee's claim to exclude the pay- ment made on the above items, viz., donation and bonus for the prior years, thus, gives a distorted picture of profit and loss account prepared by the assessee. In the circumstances, rightly the Tribunal considered the claim of the assessee to grant relief, that the donations and bonus given therein rightly deserved a deduction in computing the net profit for the purpose of working out the chargeability under section 115J of the Act.

7. Heard learned counsel appearing for both sides and perused the mate- rial available on record.

8. A perusal of section 115J of the Income-tax Act shows that in the case of an assessment falling for consideration under section 115J of the Act, the book profits will be the net profit as shown in the profit and loss account, prepared in accordance with Parts I, II and III of Schedule VI to the Com- panies Act, subject to certain adjustments provided, therefore, in the Expla- nation to section 115J of the Act, which increased or decreased the book profit.

9. In the decision reported in Apollo Tyres Ltd. v. CIT reported in [2002] 255 ITR 273, the apex court considered the question as to whether the income computed under the company law could be said to have binding effect on the Assessing Officer, that the said officer could go beyond what had been computed by the assessee in terms of Schedule VI to the Com- panies Act. The apex court held that the officer is bound to accept the authenticity of the accounts with reference to the provisions of the Com- panies Act which casts an obligation on the assessee to maintain the accounts in the manner provided for under the Companies Act certified by the statutory authority, approved by the shareholders at its general meeting and filed before the Registrar of Companies. Thus, the apex court held that the Assessing Officer has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The power available under section 115J of the Act is limited to the extent of making increase and reduction as provided for in the Explanation to section 115J of the Act. The apex court pointed out that on filing, the Registrar of Companies has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Once that is done, the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account, except to the extent provided in the Explanation to section 115J of the Act.

10. In the light of the categorical pronouncement of the apex court, as far as the present case is concerned, we do agree with the contention of the learned standing counsel appearing for the Revenue, that the net profit, as disclosed in the profit and loss account, has to be accepted a such. As far as this is concerned, even learned counsel appearing for the assessee is not having any dispute. However, the dispute remains only to the extent of the officer ignoring the deduction that ought to have been made to the extent of Rs. 9,59,501 towards bonus paid and a sum of Rs. 11,151 towards dona- tions. Learned counsel for the assessee pointed out that as in the case of investment allowance taken to the appropriation account, the said sum also goes to the appropriation account ; accordingly, a sum of Rs. 24,85,760 is a summation of all these amounts put together, and hence, not the net profit of the company. Thus, excluding the amounts paid towards dona- tions and bonus, viz., a sum of Rs. 11,151 and Rs. 9,59,501, the balance alone out of Rs. 24,85,760 ought to have been taken as book profit in terms of the Explanation to section 115J of the Act. In effect, learned counsel for the assessee seeks a reversal of the process of reasoning in the application of the profit and loss account computation, as given in Parts II and III of the Companies Act. He also emphasised that Part II of Schedule VI to the Companies Act recognises the same computation while arriving the net profit as per the profit and loss account.

11. While there is no denial of the fact that in computing the profit and loss account as per Part II of Schedule VI to the Companies Act, these expendi- ture really go in the computation of the profit and loss account, as rightly pointed out by the learned standing counsel appearing for the Revenue. Whatever be the correctness of the method adopted by the assessee herein, the fact remains that the assessee had declared its net profit at Rs. 24,85,760, as computed in accordance with Parts II and III of Schedule VI to the Companies Act. Though learned counsel for the assessee pointed out that the report of the board of directors and the shareholders clearly pointed out that out of Rs. 24,85,760, a further deduction therein was also made to show the balance of profit available for the purpose of declaring the dividend, this alone would be the true reflection of the net profit com- putation, for the purpose of considering it under section 115J of the Act.

12. Learned counsel for the assessee placed reliance on the decision reported in CIT v. Khaitan Chemicals and Fertilizers Ltd. [2008] 307 ITR 150 (Delhi), where the Delhi High Court held that in a case where in com- puting the net profit as per the statement of profit and loss account in accordance with Part II of Schedule VI to the Companies Act, the assessee had shown prior period expenses, extraordinary items, separately after the determination of current net profit. It did not mean that the net profit was to be arrived at, de hors these items. The Delhi High Court held that two approaches are indicated in paragraph 19 of the Accounting Standard (AS-5). The normal approach is to include prior period item in the deter- mination of net profit and loss for the current period. The alternative approach is to show such items in the statement of the profit and loss account after the determination of current net profit or loss. In either case, the objective is to indicate the effect of such items on the current profit or loss. Thus, the High Court accepted the plea of the assessee that the net profit for the purpose of section 115JA of the Act was to be computed only after deducting the prior period expenses/extraordinary items. The facts of the present case are distinguishable from the above reported decision. The assessee-company claimed deduction of three items of bonus payment, i.e., Rs. 9,59,501 relating to the earlier period, Rs. 10,60,012 paid on October 18, 1989, and Rs. 7,89,413 paid on October 31, 1989. The Assessing Officer allowed Rs. 9,59,501. He held that the said amount was allowable, since the same was further bonus paid on the agreement reached in respect of the earlier year's dispute. As far as the other two items were concerned, the Assessing Officer held that the assessee created a provision for Rs. 10,50,000 and it appeared as an item in the balance-sheet, hence, to that extent, it was admissible. The payment in excess of the said provision was, however, held not admissible, since the liability over and above arose only after the end of the previous year ending March 31, 1989, which could be considered in the assessment year 1990-91. Thus, the sum of Rs.7,99,425 was disallowed. Learned counsel placed before us a copy of the balance-sheet and profit and loss account for the said period, viz., 1989-90, declaring the net profit at Rs. 24,85,760.10. This was stated to be after meeting all expenses and interest. Thus, the net profit is Rs. 24,85,760, which, however, does not go for a further deduction with reference to whatever have been appropriated towards the expenditure incurred on the bonus payment for prior years.

13. Learned standing counsel appearing for the Revenue brought to our attention the unreported decision of the Kerala High Court in this regard in I.T. A. No. 74 of 2010, dated March 3, 2011 (Sree Bhagawathy Textiles Ltd. v. Asst. CIT) (since reported in [2012] 342 ITR 244 (Ker)) wherein the Kerala High Court applied the decision of the apex court in the case of Apollo Tyres Ltd. v. CIT reported in [2002] 255 ITR 273 (SC) and thereby rejected the con- tention of the assessee made on almost similar line. It is seen from the facts narrated therein that, that the assessee made a deduction of Rs. 23,29,726 from out of the profit and loss account prepared by the assessee disclosing a net profit of Rs. 1,01,37,664. The deduction represented prior period expenses, which was impermissible under the Act. The deduction originally considered was sought to be rectified in proceedings under section 154, thereby disallowing the deduction claimed from the profit available under the profit and loss account prepared in accordance with Parts II and III of Schedule VI to the Companies Act. The officer pointed out that the debit made towards prior period expenses was not in the profit and loss account prepared under the Companies Act and 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. In considering the claim of the Revenue, the Kerala High Court pointed out to the decision of the apex court in the case of Apollo Tyres Ltd. v. CIT reported in [2002] 255 ITR 273 and held that the claim of the assessee therein could not be accepted since the assessment to be completed has to be in accordance with the statutory pro- vision under section 115J of the Act. The Kerala High Court pointed out that unless the assessee had made a deduction in the computation of the net profit in the profit and loss account, the claim of the assessee could not be allowed for the purpose of computing the net profit.

14. We are in entire agreement with the reasoning of the Kerala High Court. Thus, going by the facts as narrated in the preceding paragraphs and applying the decision of the apex court in the case of Apollo Tyres Ltd. v. CIT reported in [2002] 255 ITR 273, to the facts of the case, we have no hesitation in accepting the case of the Revenue that when the profit and loss account of the assessee-company disclosed the net profit as Rs. 24,85,760 in accordance with Parts II and III of Schedule VI to the Companies Act, the assessee is not entitled to have the deduction of amounts assessed on the profit and loss appropriation account in the com- putation of net profit. In these circumstances, we allow the tax case appeal, set aside the order of the Tribunal, answering the substantial question of law in favour of the Revenue.

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