The assessee had contended that the Assessing officer was not entitled to make adjustments to book profit shown in the audited The question that had arisen was whether the Assessing officer was entitled to disturb the net profit shown by the assessee in the profit and loss account prepared as per the Companies Act, 1956.
As per the provisions of section 211 of the Companies Act, the companies have to follow the applicable accounting standards. However, if the profit and loss account and the balance sheet do not comply with the accounting standards, such companies are required to disclose about the deviation, reasons thereof and the financial impact thereon. This is provided so in sub-section (3A) and (3B) of section 211 of the Companies Act.
The accounting standards prescribe the method of treating various types of income and expenditure for the purpose of preparing the financial statements. Hence, in order to ensure uniform accounting practices and disclosures, the accounting standards have been made mandatory for the companies and, hence, they are required to follow them while preparing the financial statements. If any company deviates from the prescribed accounting standards, it has to disclose, inter alia, the financial effect arising due to such deviation. Thus, there is an option for the companies not to follow the accounting standards, if it feels so for any reason. Such deviation may have impact to the profit disclosed in the profit and loss account prepared in accordance with Part II and part III of Schedule VI of the Companies Act. Hence in order to enable anybody to understand the implication of such deviation, it was made mandatory for the companies to disclose the financial implications of such deviation. Such kind of deviations are acceptable under the Companies Act, however, they are not always acceptable to the income-tax authorities. Under the income-tax, the Assessing officer is entitled to examine the said deviations, particularly when it has an impact on the book profit. There cannot be any dispute that it is the responsibility of the assessee to substantiate the legality of any item of expenditurelincome found debitedlcredited in the profit and loss account by drawing support from any document or business practices or accounting requirements.
With regard to the claim of prior period charges/credits in the Profit and Loss account, the assessee’s explanation is that it was crystallized in this assessment year. From the explanations furnished by the assessee, it was evident that the assessee had passed the entry for prior period credits/charges in the assessment year only to ensure that the final book profit (surplus) was to be reduced. On making careful observations of the facts of the case, the said intention of the assessee was very much apparent and glaring. Besides, the assessee also could not substantiate the said claim with a legally tenable explanation. It was also not shown that the booking of such kind of entries are permitted under the accounting principles.
The question that would arise, thereafter, was whether the Assessing officer was still debarred from making any adjustment to the net profit shown in the profit and loss account, even if any entry made therein could not be properly explained in accordance with the accounting principles / business practices. The answer could be no only. That was in view of the fact that when the assessee could not furnish legally tenable explanation and also could not show that it was in accordance with established accounting principles, then it could not be said that the financial statements had been prepared in accordance with the provision of the Companies Act, even if the managementlauditors were silent on that point. Admittedly, in the present case, the provision made by the assessee relates to the sales tax demand for the assessment years 1982-93 to 1999-2000, based on the assessment order of the respective years. There is no evidence brought on record by the assessee to suggest that these assessment orders have been received by the assessee in the assessment year under consideration. The assessee, having received the sales tax assessment orders not in this assessment year and the liability being quantified in the earlier assessment years, it cannot be claimed in the assessment year under consideration. In other words, it was not an ascertained liability of the assessment year under consideration. Being so, the provision made by the assessee cannot be considered as allowable expenditure in the assessment year under consideration. In such kind of situations, the Assessing officer would definitely be entitled to make suitable adjustment to the net profit shown by the assessee to nullify the effect of such kind of accounting entries.
In view of the foregoing discussion, we hold that the Assessing officer was entitled to adopt the net profit after suitable adjustment for the purpose of computing the book profit uls. The judgment relied upon by the assessee in the case of Apollo Tyres, cited supra, cannot be applied to the present facts and circumstances of the present case. Accordingly, this ground is rejected.