IN THE INCOME TAX APPELLATE TRIBUNAL

AHMEDABAD BENCH "A"

(BEFORE SHRI R P GARG - VICE-PRESIDENT)

(AND SHRI I S VERMA - JUDICIAL MEMBER)

ITA NO.1646/Ahd/2004

(Asstt.Year:-1998-99)

ITA NO.1748/Ahd/2004

(Asstt.Year:-1998-99)

Assessee by: Shri D P Bapat

Department by: - Shri A K Panda, CIT-DR

The original assessment in this case was made determining the book profit u/s 115JA at Rs. 7,44,47,214/-.The AO thereafter observed from the records that while computing the said book profit, following two mistakes have been crept:

(i) Provision made for obsolescence loss of Rs.51,92,565/- is not added back; and

(ii)  Reduction due to change in method of inventory of Rs.98,09,000/-is not added back. (Para 2)

AO concluded that to arrive at the book profit, the net profit is to be increased by the amount carried to any reserve, by whatever name called or the amount set-aside to the provisions made for meeting liabilities, other than ascertained liabilities. According to him, these two amounts were to be increased as per the Explanation to section 115JA of the Act. He, therefore, added the same by invoking the provisions of section 154 of the Act.(Para 3)

the Assessing Officer does not have the jurisdiction to go beyond the net profit as per Profit & Loss account except as provided in Explanation to Sec.115JA of the Act, and as we have demonstrated aforesaid, these two items are not covered by the exception provided under the definition of book profit u/s.115JA. The Assessing Officer has to levy the tax only on the book profit as per the Balance Sheet, which is not found to be incorrect by any of the authorities under the Companies Act.(Para 13)

O   R   D   E   R

PER R P GARG (VICE-PRESIDENT):

1. These cross appeals are directed against the order dated 08-03-2004 passed by the CIT(A) for Assessment Year (A Y) 1998-99. For the sake of convenience, they were heard together and are being disposed of by this common order.

2. The original assessment in this case was made on 28-02-2001 determining the book profit u/s 115JA at Rs. 7 ,44,47,214/-. The AO thereafter observed from the records that while computing the said book profit, following two mistakes have been crept:

(i)         Provision made for obsolescence loss of Rs. 51,92,565/- is not added back; and

(ii)        Reduction due to change in method of inventory of Rs. 98,09,000/-is not added back.

3.      Giving an opportunity of being heard to the assessee, the AO concluded that to arrive at the book profit, the net profit is to be increased by the amount carried to any reserve, by whatever name called or the amount set-aside to the provisions made for meeting liabilities, other than ascertained liabilities. According to him, these two amounts were to be increased as per the Explanation to section 115JA of the Act. He, therefore, added the same by invoking the provisions of section 154 of the Act.

4.      The CIT(A) deleted the addition on account of reduction in the value of inventory due to change in method of valuation, as it was not in the nature of provision and certainly of not an ascertained liability, and therefore, the provisions of section 115JA would not apply. She, however, upheld the order of the AO for adding the obsolescence loss by holding that the action of the assessee to create a loss on account of this asset, has to be taken as making a provision for a loss. According to her, it was sophistry to call it a diminution in the value of asset. It is also not a liability which the assessee was required to meet and, therefore, it was not an ascertained figure, nor a liability which is the only thing that can be adjusted by the assessee in its accounts. She held that it is neither ascertained by any scientific method nor being in the year in which, the item was sold nor it being a liability to be met by the assessee, and therefore, the AO has correctly added the same.

5.         We have heard both the parties and have considered their rival submissions. The term "book profit" is defined in Explanation to section 115JA, which reads as under:

115JA Deemed income relating to certain companies.

(1)        Notwithstanding anything contained in any other provisions of this Act, where in the case of an assessee, being a company, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1^st day of April, 1997 [but before the 1st day of April, 2001] (hereafter in this section referred to as the relevant previous year) is less than thirty per cent of its book profit, the total income of such assessee  chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit.

(2)        Every assessee, being a company, shall, for the purposes of this section prepare its profit and loss account for the relevant previous year in accordance with the provisions of Part II and III of Schedule VI to the Companies Act, 1956 (1 of 1956):

Provided that while preparing profit and loss account, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the profit and loss account laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956):

Provided further - - - - - -

Explanation: For the purposes of this section, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by

(a)        the amount of income-tax paid or payable, and the provision therefor; or

(b)        the amounts carried to any reserves by whatever name called; for

(c)        the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or

(d)        the amount by way of provisions for losses of subsidiary companies; or

(e)        the amount or amounts of dividends paid or proposed; or

(f)        the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies,

if any amount referred to in clause (a) to (f) is debited to the profit and loss account, and as reduced by, -

6.      The AO has referred to clauses (b) and (c) or this Explanation dealing with reserve and provisions. Neither of the term "provision" or "reserve" are defined in the Income-tax Act. They are therefore to be taken as understood under the Companies Act. As per clause 7(1 )(b) of Part III of Schedule VI to the Companies Act, the expression "reserves" means as under:

"The expression "reserve" shall not, subject as aforesaid, include any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability."

7.      Sub-Clause (2) clause 7 of Part III Schedule VI to the Companies Act, further defines the term Provision as under:

"(2) Where -

(a)        any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, not being an amount written off in relation to fixed assets before the commencement of this Act; or

(b)        any amount retained by way of providing for any known liability; as in excess of the amount which in the opinion of the directors is reasonably necessary for the purpose, the excess shall be treated for the purposes of this Schedule as a reserve and not as a provision."

8.      The basic character of the "reserve" is therefore that it does not include depreciation, renewals or diminution in value of an assets nor it includes an amount retained by way of providing for any known liability. In the present case, the provision for diminution in value of assets has been provided by the assessee in respect of assets to the tune of Rs. 51,92,565/-. This is not included in the term "reserve" though it could be treated as a reserve under sub-clause (2) of clause 7 of Part III of Schedule VI to the Company's Act, provided it is in excess of the amount which in the opinion of the Director is reasonable and necessary for the purposes but again it has to be for providing for any known liability. Diminution in value of assets is not a provision for any liability and consequently it would not be a case of reserve.

9.         Under the Companies Act, 1956, the expression "provision' shall, subject to sub-clause (2) of this clause, mean any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy. That an amount set apart to become a provision has to be (i) provision for depreciation, renewals, or diminution in value of assets, or (ii) provision for any known liability of which the amount can not be determined with substantial accuracy.

10.       However, the Income-tax Act has adopted only one part of this definition for increasing the net profit to determine the book profit and, that is "the amount set aside to provision for meeting liability, other than ascertained liabilities" under clause (c) of Explanation below sub-section (2) of section 115JA. The 1^st part of the definition of the term' Provision' providing for amount set apart for depreciation, renewals or for diminution in the value of assets has not been enroped in this clause. Therefore any provision made by the assessee for diminution in value of assets could not be increased, which is though a provision under the Companies Act, is not covered under clause (c) of the Explanation to Sec.115JA of the Act. In our opinion, therefore the provision made for obsolescence loss for plant and machinery can not be increased to arrive at the book profit provided u/s 115JA of the Act. The Revenue authorities were not justified in adding the same.

11.    As regards the reduction in the value due to change in method of valuation of inventory of Rs. 98,09,000/- also, the amount can not be increased and the CIT(A) has rightly deleted the same. Firstly, because it is not a provision but an amount stated to have decreased profit by changed method of inventory and secondly because this is as per company's balance sheet, wherein it is so stated in Schedule 20 - Notes forming part of the Accounts clause (e) as under:

(e)        Valuation of inventories:

i)          Raw materials, packing materials and stores and spares are valued at cost.

ii)         Finished goods and stock-in-process are valued at cost of purchase of raw materials and conversion thereof including the cost incurred in the normal course of business in bringing the inventories upto the present condition or at the net realizable value is lower.

Until last year, the inventory of joint products was valued by allocating the costs by adopting 'average unit cost' method. For this year, this inventory is valued by allocating the costs to the joint products by 'relative sales value' method which is considered to be more scientific. This refinement in the method of valuation will be continued to be adopted consistently in the subsequent years.

But for this change in the accounting policy, the net profit for the year would have been higher by Rs. 93.09 lacs.

(iii)       By-products are valued at net realizable price.

12.       As stated above, this method is found to be more scientific and was continued to be adopted consistently in subsequent years. Even otherwise also, it would be a diminution in value of inventories and for the reasons stated it would increase the book profit u/s 115JA of the Act. The order of the CIT(A) on this point is accordingly upheld.

13.    Both these items are provided in the books of account as per the norms laid down in the Companies Act for preparing the Profit & Loss account under Schedule VI of the Act. They have not been found wrong by any authorities under the Companies Act. In these circumstances, as held by the Supreme Court in the case of Apollo Tyres Ltd. Vs. CIT [255 ITR 273], the Assessing Officer does not have the jurisdiction to go beyond the net profit as per Profit & Loss account except as provided in Explanation to Sec.115JA of the Act, and as we have demonstrated aforesaid, these two items are not covered by the exception provided under the definition of book profit u/s.115JA. The Assessing Officer has to levy the tax only on the book profit as per the Balance Sheet, which is not found to be incorrect by any of the authorities under the Companies Act.

14.       In the result, the assessee's appeal is allowed and the Revenue's appeal is dismissed.

Order pronounced in the open court today on 9^th April, 2007.