Deferred tax liability is a provision for tax effect of difference between taxable and accounting income – Not a provision for I -T paid or payable – it is also not reserve as same cannot be transferred to P&L a/c, unlike a regular reserve – ITAT
KOLKATA, JAN 02, 2008 : THE main issue in this Revenue appeal was whether in respect of computation of MAT , the deferred tax is not to be reckoned for arriving at the book profit under the explanation to section 115JB.
The Revenue has pleaded that deferred tax is actually
++ A Provision for tax effect and is meant for formatting future tax liability.
++ That it is not determined during the year and therefore, the same could not be said to be an ASCERTAINED PROVISION.
++ Deferred tax charge is nothing but the charge of income-tax, which is liable to be added in Explanation (a) to sub-section (2) of section 115JB.
++ The same should be treated as an amount credit to reserve within the meaning of Explanation (b) to sub-section (2) of section 115JB.
The Assessee, on the other hand, has contended that DEFERRED TAX CHARGE is
++ ASCERTAINED LIABILITY and the same is created in accordance with AS-22 issued by the ICAI, which is mandatory to be followed by all the Assessees.
++ It is not in the form of RESERVE as stipulated in Explanation (b) to sub-section (2) of section 115JB.
++ The same could not be treated as income tax paid or payable within the meaning of Explanation (a) to sub-section 2 of section 115JB.
++ The Deferred Tax Charge could not be covered under clause (c) of said Explanation as charge is certainly an ascertained liability.
The tribunal dealt with the various objections of Revenue in deleting the addition made by the A.O.
The first limb of arguments by the Revenue is that the deferred tax charge to Profit & Loss A/c. is identical to the amount of income tax paid or payable and, therefore, the same is to be treated at par with clause (a) to the Explanation to sub-section (2) of section 115JB.
It has been submitted by the D.R. that the above deferred tax charge is nothing but is in the nature of income-tax, which is liable to be added in view of clause (a) to Explanation to sub-section (2) of section 115JB.
++ However, the tribunal did not accede to such objection raised by the Department and ruled that deferred tax means the tax effect of timing difference due to differences between taxable income and accounting income for a period that originate in one period and is capable of reversal and, therefore, such deferred tax charge is a provision for tax effect of difference between taxable income and accounting income and not provision for income tax paid or payable and, therefore, could not be covered under Explanation (a) to subsection (2) of section 115JB.
++ Likewise deferred tax charge cannot be treated at par with income tax paid / payable as both are quite different.
++ There is a difference between the amount in respect of a particular item of revenue or expense as recognized in the statement of profit and loss and the corresponding amount, which is recognized for the computation of taxable income. Therefore, it is apparent that deferred tax charge could not be termed as income-tax paid or payable, which has to be paid out of the profit earned by the Assessee for the year under consideration and whereas deferred tax charge arises when there is a loss and hence ruled as a charge that is permitted to be allowed as a deduction as held by the CIT (A)..
Coming to the second objection by the Revenue that such deferred tax charge is covered within clause (b) to Explanation to sub-section (2) of section 115JB as the same is in the nature of reserve.
++ Such objection raised by the Revenue was not accepted by the tribunal as devoid of any merit. There are many differences between the terra reserve as stipulated in Explanation (b) to sub-section (2) of section 115JB and reserve created for the purpose of deferred tax charge. As reserve within the meaning of Explanation (b) can unilaterally be transferred back to the profit & loss a/c, whereas a deferred tax charge cannot be so transferred to the profit & loss a/c.
++ Furthermore, the reserve mentioned in clause (b) can be utilised for issuing bonus shares or for declaration of dividend, whereas deferred tax charge cannot be utilised for such purposes.
++ It is also pertinent to note that as per AS-22, deferred tax charge is treated as an expenses of the period in which it is charged, and such expenses cannot be treated as a reserve within the meaning of clause (b) to Explanation to sub-section (2) of section 115JB.
++ The guidelines of ICAI also advice to treat deferred tax charge separately than reserve as stipulated in clause b to explanation to sub-section 2 to section 115JB.
The 3rd objection by the Revenue in this case is on account of considering such deferred tax liability to be covered under clause (c) to Explanation to subsection (2) of section 115JB contending that such amounts are unascertained liabilities.
++ However, the tribunal after a close perusal of clauses as mentioned in Paras 20 to 23 in AS-22 makes it clear that such deferred tax charges are measured scientifically and as per strict guidelines of ICAI issued from time to time. Paras 30 and 31 of AS-22 issued by ICAI make it obligatory on the part of Assessee to give break-up of deferred tax liability into major component of the respective balances in its notes of accounts which makes it clear that such deferred tax charges are being computed on scientific method, and as such could not be treated as unascertained liabilities.
++ It was also pointed out by the tribunal that the Revenue has not disputed the calculation of such deferred tax charge by the Assessee which has been made as per guidelines stipulated in AS-22 by ICAI, the same could not be considered as an unascertained liability within the meaning of Explanation (c) to sub-section (2) of section 115JB.
++ Apart from rejecting the above three lines of objections raised by revenue, the tribunal also noted that any withdrawal from the provision for deferred tax liability would be offered for tax in accordance with the proviso of Explanation (i) to section 115JB. Hence, the Revenue would not be worse off (except the timing difference) if the deferred tax charge is not added back to arrive at the book profit.
++ In case a deferred tax asset is created by crediting the profit and loss account, it would be considered as part of book profit and it would result in absurdity if provision for deferred tax liability (which is debited to the profit and loss account) is also added back to arrive at the book profit.
++ Since it is a well settled rule of interpretation that rational construction must prevail over literal interpretation, if later leads to absurd results. An interpretation which results in absurdity should be avoided.
The tribunal therefore, held that deferred tax charge is not covered by any of the clauses of the Explanation to subsection 2 to Explanation 115JB as objected by the Revenue and therefore such deferred tax charge is not required to be added back in the computation of book profit for the purpose of section 115JB, and therefore, upheld the order of the CIT(A) in this regard and rejected the ground raised by the Revenue.
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