Commissioner of Income Tax vs Swamiji Mills Ltd.

Mrs. Chitra Venkataraman, J.—The tax case appeal is filed by the Revenue against the common order of the Tribunal, Chennai "C" Bench, dt. 26th June, 2001, in ITA No. 786 of 1993 relating to the asst. yr. 1989-90, raising the following substantial question 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 s. 115J ?

The assessee is a company, whose assessments were taken up for consideration under s. 115J of the IT Act (hereinafter referred to as "the Act"). While completing the assessment under s. 115J of the Act, the AO 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 CIT(A).

The assessee took the contention that the AO should have deducted the bonus paid, viz., Rs. 9,59,501 as well as the donation amounting 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 CIT(A) pointed out that the net profit for the purpose of s. 115J of the Act was to be computed in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act. Item F1 of sub-cl. (x), cl. (3) of Part II of Sch. VI to the Companies Act shows that apart from wages and salaries, bonus has to be set out in the P&L a/c. So too, the information regarding miscellaneous expenses also needs to be disclosed therein. Thus, the CIT(A) held that the donation and the bonus have to be deducted in arriving at the profit under s. 115J of the Act. Aggrieved by the same, the Revenue filed an appeal before the Tribunal questioning the said deduction. As against certain disallowance, the assessee also went on appeal before the Tribunal.

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 computing the income under the IT Act, as per the normal computation, 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 Sch. VI to the Companies Act for the purpose of the IT 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''s appeal. Aggrieved by the same, the Revenue is on appeal before this Court.

Learned Counsel appearing for the Revenue placed heavy reliance on the decision of the apex Court in the case of Apollo Tyres Ltd. Vs. Commissioner of Income Tax, Kochi, pointing out that once the net profit is arrived at in terms of Sch. 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 AO should have adhered strictly to the net profit arrived at in terms of the provisions of Sch. VI and in the P&L a/c. Except for making addition and deduction in terms of the Explanation to s. 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 s. 115J of the Act. So long as the net profit shown by the assessee in the P&L a/c 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 AO could only compute on the basis of what was disclosed therein and he could not go for further deduction.

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 IT Act, this had been treated as expenditure. That being the case, for computing the book profit, the same could not be treated differently. The bonus payment and donations were paid from out of the profits of the previous 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 s. 115J of the Act. He further pointed out that the rejection of the assessee''s claim to exclude the payment made on the above items, viz., donation and bonus for the prior years, thus, gives a distorted picture of P&L a/c 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 s. 115J of the Act.

Heard Learned Counsel appearing for both sides and perused the material available on record.

A perusal of s. 115J of the IT Act shows that in the case of an assessment falling for consideration under s. 115J of the Act, the book profits will be the net profit as shown in the P&L a/c, prepared in accordance with Parts I, II and III of Sch. VI to the Companies Act, subject to certain adjustments provided, therefore, in the Explanation to s. 115J of the Act, which increased or decreased the book profit.

In the decision reported in Apollo Tyres Ltd. vs. CIT (supra), 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 AO, that the said officer could go beyond what had been computed by the assessee in terms of Sch. VI to the Companies Act. The apex Court held that the officer is bound to accept the authenticity of the accounts with reference to the provisions of the Companies 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 RoC. Thus, the apex Court held that the AO 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 s. 115J of the Act is limited to the extent of making increase and reduction as provided for in the Explanation to s. 115J of the Act. The apex Court pointed out that on filing, the RoC 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 AO does not have the jurisdiction to go behind the net profit shown in the P&L a/c, except to the extent provided in the Explanation to s. 115J of the Act.

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 P&L a/c, has to be accepted as 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 donations. 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 donations and bonus, viz., sums 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 s. 115J of the Act. In effect, Learned Counsel for the assessee seeks a reversal of the process of reasoning in the application of the P&L a/c computation, as given in Parts II and III of the Companies Act. He also emphasised that Part II of Sch. VI to the Companies Act recognises the same computation while arriving at the net profit as per the P&L a/c.

While there is no denial of the fact that in computing the P&L a/c as per Part II of Sch. VI to the Companies Act, these expenditure really go in the computation of the P&L a/c, 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 Sch. 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 computation, for the purpose of considering it under s. 115J of the Act.

Learned Counsel for the assessee placed reliance on the decision reported in The Commissioner of Income Tax Vs. Khaitan Chemicals and Fertilizers Ltd., where the Delhi High Court held that in a case where in computing the net profit as per the statement of P&L a/c in accordance with Part II of Sch. 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 para 19 of the Accounting Standard (AS-5). The normal approach is to include prior period item in the determination of net profit and loss for the current period. The alternative approach is to show such Items in the statement of the P&L a/c 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 s. 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 18th Oct., 1989, and Rs. 7,89,413 paid on 31st Oct., 1989. The AO 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 AO 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 31st March, 1989, which could be considered in the asst. yr. 1990-91. Thus, the sum of Rs. 7,99,425 was disallowed. Learned Counsel placed before us a copy of the balance sheet and P&L a/c 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.

Learned standing counsel appearing for the Revenue brought to our attention the unreported decision of the Kerala High Court in this regard in IT Appeal No. 74 of 2010, dt. 3rd March, 2011, Sree Bhagawathy Textiles Ltd. Vs. Assistant Commissioner of Income Tax, and thereby rejected the contention 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 P&L a/c 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 s. 154, thereby disallowing the deduction claimed from the profit available under the P&L a/c prepared in accordance with Parts II and III of Sch. VI to the Companies Act. The officer pointed out that the debit made towards prior period expenses was not in the P&L a/c 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 s. 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. vs. CIT (supra) 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 provision under s. 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 P&L a/c, the claim of the assessee could not be allowed for the purpose of computing the net profit. We are in entire agreement with the reasoning of the Kerala High Court. Thus, going by the facts as narrated in the preceding paras and applying the decision of the apex Court in the case of Apollo Tyres Ltd. vs. CIT (supra), to the facts of the case, we have no hesitation in accepting the case of the Revenue that when the P&L a/c of the assessee-company disclosed the net profit as Rs. 24,85,760 in accordance with Parts II and III of Sch. VI to the Companies Act, the assessee is not entitled to have the deduction of amounts assesseed on the profit and loss appropriation account in the computation 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.