Case Law Details
During the year under consideration, Assessee adjusted Rs. 1,02,88,421/ – against General Reserve for reinstatement of employee benefit obligation on account of adoption of AS-15 (Revised 2005) “Employee Benefits’. The said amount was claimed under regular provisions and while computing book profit since the expenses are allowable expenditure incurred during the normal course of business. The A.O. did not allow said exclusion in computation of Book Profit u/s 115JB of the Act stating that such downward adjustment is not allowed in the explanation below Sec.115JB(2) of the Act.
Held- Amount withdrawn from General Reserve on account of reinstatement of employees benefit obligation is allowable while computing Book Profit u/ s 115JB as same is an obligation of the assessee as an employer and is an ascertained liability.
1. Ground No. 4 raised by the revenue in its appeal and ground no.3. raised by the assessee in its appeal can be conveniently decided together. These grounds of appeal are as follows :‑
Revenue’s appeal:
“4. That on the facts and in the circumstances of the case the 14. CTT(A) was not justified and erred while giving direction to the A.O. to verify the account of provision made for employees’ benefit in computing book profit 115JB of the Act and grant the relief accordingly, if the contention of the appellant is found to be correct. The direction of the Ld. CIT(A) tentamounts to set aside the case to the file of the A.O. which is not empowered to do and this is a question of involvement of law.”
Assessee’s appeal
“3.0 That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and erred in referring the matter relating to exclusion of amount withdrawn from General Reserve on account of reinstatement of employees benefit obligation amounting to Rs. 1,02,88,421/- while computing Book Profit u/ s 115JB of the Act back to the Assessing Officer instead of outright deciding the issue.”
2. The issue involved in the aforesaid grounds of appeal is with regard to exclusion of amount withdrawn from General Reserve on reinstatement of employees benefits obligation while computing Book Profit U/s 115JB of the Act of a sum of Rs.1,02,88,421/-. During the year under consideration, Assessee adjusted Rs. 1,02,88,421/ – against General Reserve for reinstatement of employee benefit obligation on account of adoption of AS-15 (Revised 2005) “Employee Benefits’. The said amount was claimed under regular provisions and while computing book profit since the expenses are allowable expenditure incurred during the normal course of business. The A.O. did not allow said exclusion in computation of Book Profit u/s 115JB of the Act stating that such downward adjustment is not allowed in the explanation below Sec.115JB(2) of the Act.
3. On appeal by the Assessee, the CIT(A) found that as per Note 21 of Schedule 22 to the Balance Sheet all defined benefit plans recognised in Financial Statements including contribution to employee’s benefit were adjusted with General Reserve and was made as per actuarial valuation. The CIT(A) therefore held that the amount represents ascertained liability. The CIT(A) following the decision of CIT -vs.- Sain Processing & Weaving Mills P. Ltd (2010) 325 ITR 565 (Del) held that since provision for contribution to employee’s benefit is a normal business expenditure and same has been disclosed in the notes to accounts, said expenditure is to be taken into account for the purpose of arriving at book profits u/s 115JB of the Act. He held that normally the provision for employee’s benefit is required to be debited to the P&L account. Hence in order to arrive at correct Book Profit, same is required to be reduced from net profit. The issue was however set aside to the file of A.O. to verify the account of provision made for employee’s benefit while computing Book Profit and grant relief accordingly.
4. Aggrieved by the order of the CIT(A) directing the AO to reduce the aforesaid sum for arriving at book profit u/s. before the Tribunal. Aggrieved by the order of the CIT(A) directing the AO to verify the account of provision made fore employee’s benefit while computing book profit and grant relief, the Assessee has raised Gr.No.3 in its appeal.
5. We have heard the rival submissions. The learned DR relied on the order of the AO. The learned counsel for the Assessee submitted that expenses incurred on contribution to employees’ benefit is a normal allowable business expenditure. It was submitted that as per clause (c) of Explanation (1) of Sec. 115JB of the Act only ascertained liability is required to be added back while computing Book Profit. Since provision on account of employees’ benefit is created on the basis of actuarial valuation, it is an ascertained liability which is not required to be added back while computing book profit. Reliance in this regard can be placed on the decision of CIT – vs.- National Hydro Electric Power Corporation Ltd (2010) 45 DTR 117 (P&H) wherein similar view was upheld by the Hon’ble High Court. It was submitted that the issue is squarely covered by the decision of Hon’ble Pune Tribunal in K.K Nag Ltd -vs.- ACIT (2012) 52 SOT 0381 (Pune Trib) wherein it was held that on a conjoint reading of sub-sections (2), (3A) of section 211 and Part 11 of Schedule VI to the Companies Act, 1956 and the Accounting Standard – 15, it was imperative for the assessee to set out the incremental liability towards leave encashment in the annual accounts. If the same is set out by way of a disclosure in the Notes forming part of the annual accounts and not by way of an entry in the P&L account, the same is sufficient because the net profit as shown in the P&L account for the purposes of Explanation 1 to the second Proviso to section 115JB of the Act is to be understood with reference to the Notes to accounts accompanying the annual accounts also. It was held that use of the expression ‘net profit’ in Explanation 1 to the second Proviso to section 115JB of the Act makes it clear that the impugned incremental liability towards leave encashment not debited to the Profit & Loss account but otherwise disclosed in the Notes to Accounts will have to be taken into account while determining the “book profits” under section 115JB of the Act. It was submitted that the provision made on account of employees’ benefits is an ascertained liability which is to be deducted from net profit as per P&L account in order to compute correct book profit u/ s 115JB. Reliance in this regard is placed on decision of Hon’ble Delhi High Court in CIT -vs.- Sain Processing & Weaving Mills P. Ltd (2010) 325 ITR 565 (Del) wherein the question was whether depreciation not debited in the profit and loss account of an Assessee whether can be reduced from the net profit as per profit and loss account for the purpose of Sec.115JB of the Act. It was held that current year depreciation not debited to P&L account but disclosed in notes to accounts is eligible to be deducted from net profit while computing book profit u/ s 115JB as notes to accounts form part of the P&L al c by virtue of Sec. 211(6) of the Companies Act, 1956.
6. At the time of hearing it was brought to our notice that pursuant to the directions of CIT(A) in the impugned order AO passed an order dated 05.07.2012 giving effect to the directions of CIT(A) in which the AO had not accepted the claim of the assessee and made the following observations :‑
“In respect of disallowance of claim of downward adjustments of Rs.1,02,88,421/- in the computation of Book of Profit, the direction of Ld. CIT(A) relates to verification on account of provision made for Employees benefit while computing book profit cannot be carried out for giving relief because the amount of rs.1,02,88,421/- was excluded by the AO in computing book profit, but there was no scope to verification of Provision from P&L accounts, Ld. CIT(A) did not give order to verify from which angle the provision has to be verified. Hence, no further relief may be allowed against the disallowance of claim.”
7. Before us the ld. DR reiterated the stand of the AO as reflected in the assessment order as well as in the order giving effect to the order of CIT(A). The ld. Counsel for the assessee reiterated the submissions as were made before CIT(A). The ld. Counsel for the assessee also attempted to argue that the findings of the AO in the order dated 05.07.2012 giving effect to the directions of CIT(A) in the impugned order are incorrect. The Bench however pointed out that any grievance against the order dated 05.07.2012 has to be projected by way of an appeal against the said order and cannot be the subject matter for consideration in the present appeal filed against the impugned order.
8. We have considered the order of CIT(A) and are of the view that the conclusions drawn by CIT(A) are clearly supported by the decisions referred to by CIT(A) as well as the decisions referred to by the ld. Counsel for the assessee before us. Since the amount in question was an obligation of the assessee as an employer the liability arising on account of such obligation should also be considered while arriving at the book profit for the purpose of Sec.115JB of the Act. Thus on the principle laid down in the decisions on which the ld. Counsel has placed on reliance, we are of the view that CIT(A) was justified in accepting the plea of the assesses. With regard to the directions of CIT(A) to verify whether the account of the provisions made for employee benefit has already been debited in the profit and loss account, the directions of CIT(A) his order is correct and is for the assessee to explain as to how the sum in question are not debited in the profit and loss account but nevertheless need to be excluded . We do not find any merits in the grounds raised by the assessee also.
