Section 115jb

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

20 September 2012 IT'S URGENT

WHETHER PREVIOUS YEAR EXPENSE DEBITED TO P & L A/C. IS DISALLOWED WHILE CALCULATING BOOK PROFIT AS PER SECTION 115JB

Deepanshu Agg.

Deepanshu Agg. (Expert)
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22 September 2012 Section 115JB is a deeming fiction, it no where says to increase book profit by prior period expenses , hence not to be disallowed while computing book profits u/s 115JB

CA Lokesh Pokharna

CA Lokesh Pokharna (Expert)
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22 September 2012 Sec 115 JB says talks about AS compliances to be done as per last years P &l hence this point need to be consider.

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Deepanshu Agg.

Deepanshu Agg. (Expert)
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22 September 2012 Agreed with CA lokesh

Kindly consider the relevant case laws as enumerated below:-

The Supreme Court has in the decision of Apollo Tyres Ltd. v. CIT, [2002] 255 ITR pointed out that sub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh inquiry with regard to the entries made in the books of account of the company. The said sub-section mandates the company to maintain its account in accordance with the requirements of the Companies Act for the limited purpose to find out whether the computation is done in accordance with the provisions of the Companies Act. The assessing authority has a limited jurisdiction to satisfy himself that the accounts are maintained in accordance with the provisions of the Companies Act. Beyond that, the assessing authority has no jurisdiction to go further into accounts.
The Delhi High Court in the case of CIT v. Khaitan Chemicals and Fertilizers Ltd.[2008] 307 ITR 150 while dealing with facts similar to instant case had pointed to the Accounting Standard(AS-5) and stated that Accounting Standards clearly stipulates that prior period items are income or expenses which arise ‘in the current period’ as a result of errors or omissions in the preparation of the financial statement of one or more prior periods. Referring to paragraph 7 of AS-5, the Delhi High Court pointed out that the net profit or loss comprise of extraordinary items and the same should be disclosed on the face of the statement of profit and loss.
Prior period items are also enumerated in paragraphs 15 and 19 of Accounting Standard. Dealing with the Accounting Standard-5, the Delhi High Court pointed out that income or expenses relating to prior period items, merit to be included in the determination of net profit or loss. It reasoned out that both the prior period items and extraordinary items are to be included in the determination of the net profit or loss and as per paragraph 15 of the AS-5, that prior period items should be separately disclosed in the statement of profit and loss.
Thus, the Delhi High Court held that whether the prior period expenses were shown separately or not, the assessee would nevertheless be entitled to have the adjustment of the prior period expenses in the matter of computing the net profit of the assessee. Thus on mere fact that the assessee had shown its prior period expenses in the extraordinary items separately, did not mean the net profit was arrived at de hors these items. The Delhi High Court further pointed out that the assessee had not claimed any deduction with the net profit on the basis of any clauses given in the Explanation to section 115JA(2). Consequently the question was answered in favour of the assessee. The view expressed by the Delhi High Court is agreed with and is applied to the instant case.
Thus going by the decision of the Supreme Court in Apollo Tyres Ltd.’s case(supra) and applying the facts thus found that in computing the net profit the assessee had adjusted prior period expenses, rightly, the assessee offered the book profit for assessment. No exception could be taken to the course adopted by the assessee in adjusting the prior period expenses in computing the net profit. In the light of the law declared by the Supreme Court as to the jurisdiction of the Assessing Officer in respect of the matter of MAT assessment, it is to be held that once the Officer accepts the book profit, he cannot travel beyond what had been disclosed in the book profit. In the matter of granting adjustment to the prior period expenses, applying the decision of the Delhi High Court in the Khaitan Chemical & Fertilizers Ltd.’s case (supra), the order of the Tribunal is to be set aside and the appeal is to be allowed. The substantial question of law is decided in favour of the assessee.