Case Law Details
International Bakery Products Ltd. Vs ACIT (ITAT Chennai)
Prior period item whether expenses or income is an item of expense deductible or item of income, always comes below the line in the profit & loss account. That means, for all practical purposes, the net profit as per books of account for the relevant period is net profit computed without making any adjustment by deducting prior period items or other appropriations made in the current financial year. If you go by this analogy then, provision for gratuity relating to earlier years claimed by the assessee under the head ‘prior period items’ comes below the line in profit & loss account. If you consider provision for gratuity relating to earlier years as item comes below the line of profit & loss account, then for the purpose of computation of book profit, net profit as per books of accounts should be considered before allowing deduction for provision for gratuity relating to earlier years. In this case, profit for the year before allowing deduction for provision for gratuity was at Rs.40,78,793/- and if you consider said figure, then adjustment made by the assessee to book profit computed u/s.115JB of the Act towards provision for gratuity relating to earlier years is not covered under Explanation (1) to Section 115JB of the Act. Further, it is a well settled principle of law that the AO does not have power to make any adjustment to book profit except as provided under Explanation (1) to Section 115JB of the Act. This is amply clear from the decision of Hon’ble Supreme Court in the case of M/s. Apollo Tyres Ltd., vs. CIT, supra. Therefore, we are of the considered view that there is no error in reasons given by the AO to compute book profit u/s. 115JB of the Act by taking net profit as per profit & loss account before considering deduction claimed for prior period item being provision for gratuity relating to earlier years.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This appeal filed by the assessee is directed against order of learned Commissioner of Income Tax (Appeals) – 13, Chennai, dated 22.02.2018 and pertains to assessment year 2006-07.
2. The assessee has raised the following grounds of appeal:-
1. For that the order of the Commissioner of Income Tax (Appeals) is contrary to law, facts and circumstances of the case to the extent prejudicial to the interests of the appellant and is opposed to the principles of equity, natural justice and fair play.
2. For that the Commissioner of Income Tax (Appeals) erred in concluding that the adjustments made by the appellant on account of provisions of gratuity relating to earlier years is not in accordance with the provisions of section 115JB of the Income Tax Act, 1961
3. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the gratuity provision created and charged based on the actuarial valuation being the ascertained liability is deductible in arriving at the quantification of the books profits
4. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the Assessing officer has accepted book loss of Rs 20,19,390/- for computation of tax as per normal provisions of income tax however, while computing book profit for the purpose of Section 115JB of the Income Tax Act, 1961, the A.O has determined the book profit as Rs 40,78,793/-
5 For that the Commissioner of Income Tax (Appeals) failed to appreciate that the Assessing Officer has erred in ignoring the fact that provision for gratuity for earlier years was disclosed separately in the Profit and Loss Account for the purpose of prior period items only.
3. The brief facts of the case are that the assessee is engaged in the business of manufacture of customer’s brand biscuits, filed its return of income for the assessment year 2006-07 on 29.11.2006 admitting ‘nil’ total income under normal provisions as well as the provisions of section 115JB of the Income Tax Act, 1961 (hereinafter the ‘Act’). The assessment has been completed u/s. 143(3) of the Act on 25.11.2008 and determined total income of Rs.Nil under normal provisions of the Act and book profit of Rs.40,78,793/- u/s. 115JB of the Act, where the ld.AO has taken book profit of Rs.40,78,793/- without considering deduction claimed by the assessee towards provision made for gratuity liability. The assessee carried the matter in appeal before the CIT(A), but could not succeed. The CIT(A) after considering relevant facts and also by following the decision of Hon’ble Supreme Court in the case of M/s. Apollo Tyres Ltd. vs. CIT, 255 ITR 273 held that provision for gratuity relating to earlier years is not in accordance with provisions of section 115JB of the Act. He further noted that explanation to section 115JB of the Act, does not provide for adjustment made by the assessee. Aggrieved by the CIT(A) order, the assessee is in appeal before us.
4. The ld.AR for the assessee submitted that the ld.CIT(A) has erred in sustaining computation of book profit u/s.115JB by the AO, without considering provision made for gratuity in books of accounts and computed net loss for the year. The AO has taken net profit before allowing deduction towards provision for gratuity without appreciating the fact that provision made for gratuity relating to earlier years is deductable on the actuarial valuation basis.
5. The ld.DR on the other hand strongly supporting order of the ld.CIT(A) submitted that the assessee has debited provision for gratuity relating to earlier years below the line in the profit & loss account, which means the same item needs to be considered in light of Explanation -1 to section 115JB of the Act. If you consider Explanation – 1 to section 115JB of the Act, then deduction claimed by the assessee is neither covered under positive or negative adjustments. Hence, there is no error in the reason given by the AO to take net profit as per profit & loss account before allowing deduction towards gratuity liability.
6. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The provisions to section 115JB of the Act, deals with computation of book profit. Explanation (1) to section 115JB of the Act provides for positive and negative adjustments. It is a well settled principle of law by various decisions of courts including the decision of Hon’ble Supreme Court in the case of M/s. Apollo Tyres Ltd vs. CIT, supra, that except as provided under Explanation (1), the AO cannot make any adjustment to book profit computed u/s.115JB of the Act. In this case, the assessee has taken book loss of Rs.20,19,930/-whereas, the AO has considered book profit of Rs.40,78,793/-. The reason for difference in net profit / loss taken by the assessee and the AO is, on account of provision for gratuity relating to earlier years as prior period item. As per provisions of Act and accounting principles, prior period item whether expenses or income is an item of expense deductible or item of income, always comes below the line in the profit & loss account. That means, for all practical purposes, the net profit as per books of account for the relevant period is net profit computed without making any adjustment by deducting prior period items or other appropriations made in the current financial year. If you go by this analogy then, provision for gratuity relating to earlier years claimed by the assessee under the head ‘prior period items’ comes below the line in profit & loss account. If you consider provision for gratuity relating to earlier years as item comes below the line of profit & loss account, then for the purpose of computation of book profit, net profit as per books of accounts should be considered before allowing deduction for provision for gratuity relating to earlier years. In this case, profit for the year before allowing deduction for provision for gratuity was at Rs.40,78,793/- and if you consider said figure, then adjustment made by the assessee to book profit computed u/s.115JB of the Act towards provision for gratuity relating to earlier years is not covered under Explanation (1) to Section 115JB of the Act. Further, it is a well settled principle of law that the AO does not have power to make any adjustment to book profit except as provided under Explanation (1) to Section 115JB of the Act. This is amply clear from the decision of Hon’ble Supreme Court in the case of M/s. Apollo Tyres Ltd., vs. CIT, supra. Therefore, we are of the considered view that there is no error in reasons given by the AO to compute book profit u/s.115JB of the Act by taking net profit as per profit & loss account before considering deduction claimed for prior period item being provision for gratuity relating to earlier years.
7. As regards case law relied upon by the assessee in the case of ACIT vs. Harrisons Malyalam Ltd., (2015) 42 ITR (Trib) 0090, we find that although the ITAT, Cochin Bench has considered the issue for provision for gratuity while computing book profit and held that provision for gratuity cannot be added for computing book profit u/s.115JB of the Act, but fact remains that there is a difference between provision for gratuity of current year and provision for gratuity relating to earlier years. If provision for gratuity relating to current financial year is provided on actuarial basis, then same is deductible expenses and thus, the question of making adjustment to book profit does not arise. If provision for gratuity relating to earlier years is provided in the books of accounts as item of prior period expenses, then same needs to be provided in the profit & loss account below the line and hence, the same should be considered in light of Explanation – (1) to section 115JB of the Act. In the case relied upon by the AR, it is not very clear whether adjustment made by the AO towards provision for gratuity pertains to current year provision or provision for earlier years. Hence, the case law relied upon by the assessee is not considered.
8. In this view of matter and considering facts and circumstances of this case, we are of the considered view that there is no error in computation of book profit u/s.115JB of the Act by excluding prior period item. Hence, we are inclined to uphold the findings of the CIT(A) and we reject the ground taken by the assessee.
9. In the result, the appeal filed by the assessee is dismissed.
Order pronounced in the court on 27th September, 2021 at Chennai.
