Monday, April 25, 2011

Prior period expenses not to be deducted while computing book profit for the purposes of section 115JA

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Shree Bhagawathy Textiles Ltd. v. Asstt. CIT-ITA No. 74/2010-Kerala High Court Judgment

The assessee disclosed a book profit of Rs. 78,43,643 and accepting the same the assessing officer completed the assessment on 30 per cent of the book profit i.e., fixing the income at Rs. 23,53,093. However, later the assessing officer noticed that the profit and loss account prepared by the assessee under Parts II and III of Schedule VI of the Companies Act dislcosed a profit of Rs. 1,01,37,664, wherefrom the assessee had made a deduction of Rs. 23,29,726 towards prior period expenses which is impermissible under the statute and this mistake was rectified in proceedings initiated under section 154 of the Act by disallowing deduction claimed by the assessee from the profit available under the profit and loss account above-referred.

Held : What is clear from the above is that the assessing officer should start with the profit available in the profit and loss account prepared in terms of Parts II and III of Schedule VI of the Companies Act. The profit under the said profit and loss account admittedly is Rs. 1,01,37,664. The way assessee has claimed deduction based on the profit and loss appropriation account is detailed in the order of the CIT(A). What is clear from the said order is that the assessee made a further deduction from the profit available under profit and loss account prepared under the Companies Act. Obviously unless the deduction made by the assessee is permissible in terms of clauses (i) to (ix) of Explanation to section 115JA above stated, the same is inadmissible. Assessee has no case that the prior period expenses is an item that could be deducted from the profit in terms of any of the clauses covered by Explanation to section 115JA. So much so, the claim is not a deduction allowable from the profit taken from the profit and loss account prepared under the Companies Act. When the deduction is admittedly not admissible under the provisions of the Act, assessee wants to bank on the technicality that the deduction, though wrongly allowed in the assessment based on the wrong claim mae by the assessee, cannot be revised in rectification proceedings under section 154. The assessing officer has to start assessment by adopting the profit available in the profit and loss account prepared in terms of Parts II and III of Schedule VI of the Companies Act. If the assessee has made a claim of deduction from this profit not enumerated in the clauses (i) to (ix) covered by Explanation to section 115JA, the assessment so completed based on the profit taken from the profit and loss account appropriation account submitted by the assesseee happens to be an apparent mistake which could having satisfied on the factual mistake committed by the assessing officer in the original assesment, rightly upheld the revised assessment issued under section 154 by reversing their earlier order.