Income Tax Appellate Tribunal - Jaipur
Maharaja Shree Umaid Mills Ltd. vs Asstt. Cit on 31 July, 2007
ORDER
I.C. Sudhir, Judicial Member
1. The revenue has questioned first appellate order on the grounds that the learned Commissioner (Appeals) has erred in upholding:
(1) Validity of order passed under Section 154 ; and (2) Action of assessing officer in making adjustment of Rs. 1,14,24,000 in respect of provision for deferred taxation while computing the book profit for the purpose of Section 115 JB.
2. We have heard and considered the arguments advanced by the parties in view of orders of the lower authorities, material available on record and the decision relied upon by them.
3. The relevant facts are that for assessment year 2002-03 the assessee-company had filed its return of income in Form No. 1 at Rs. 71,96,700 computed in the normal course as per provisions of Income Tax Act, 1961. Since the tax payable on the total income for the relevant previous year was less than 71/2 per cent of the book profit, computation of tax was made as per provisions of Section 115JB of the Act. The book profit so computed was Rs. 4,51,95,130. The assessing officer in the order under Section 154 observed that for assessment year 2002-03 income was declared by the assessee at Rs. 71,96,700 and at the time of filing the return, the assessee himself had computed book profit of Rs. 4,51,96,130 as per Auditor Report. However, while computing the book profit under Section 115JB, assessee did not add back Rs. 1,14,24,000 which was shown in the balance sheet as provision for deferred tax debited to Profit & Loss account. Since the book profit was under-assessed by this amount, the assessing officer after giving opportunity under Section 154 had made rectification in the assessment order to recompute MAT under Section 115JB. The order under Section 154 was questioned before the learned Commissioner (Appeals) on two counts. Firstly, the adjustment of Rs. 1,14,24,000 was permissible under Accounting Stan- A dard-22 and secondly, under provisions of Section 154 only such mistakes can be rectified which are apparent from record and not such mistakes which have two possible views for interpretations or which are debatable in nature. The learned Commissioner (Appeals) did not agree with the contentions of the assessee and upheld the action of the assessing officer under Section 154 of the Act while dismissing the first appeal.
4. In support of the grounds, the learned A/R pointed out that the assessee had submitted the reply dated 7-2-2004 stating that the provisions of Section 154 of the Act were not at all attracted and as such could not be invoked; and that the increase in the book profit as contemplated by the learned assessing officer, could not and need not be made, inter alia, in view of the ratio of decision of the Supreme Court in Apollo Tyres Ltd. v. CIT .
It was further clarified:
(i) that, firstly, legally the provisions of Section 154 could not be invoked in this case because there was no mistake apparent from the record as such or at all;
(ii) that, the item called ' Deferred Tax Liability' is neither the 'income-tax paid' nor 'payable' under the Income Tax Act; nor is it a 'provision therefore' as referred to in Clause (a) of the Explanation below Sub-section (2) of Section 115JB;.
(iii) that, 'Deferred Tax Liability' is an ascertainable and as such an 'Ascertained Liability'; and is mandatorily required to be accounted for as per provisions of the Companies Act, 1956 and in accordance with the legally incumbent provisions thereof to follow the Accounting Standard-22 laid down by The Institute of Chartered Accountants of India (ICAI); and
(iv) that, even if it is called a provision , it is clearly for an 'ascertained liability' and not otherwise. As such, it does not fall either, under the item (c) of the Explanation below Sub-section (2) of Section 115JB of the Act.
4.1 The learned assessing officer went ahead to pass his order under Section 154 dated 2-9-2004, holding as follows:
However, while going through the method employed for calculating the book profit under Section 115JB, the assessee did not add Rs. 1,14,24,000, on account of provision for deferred taxation debited to the P&L Account. Since the book profit was under assessed by this amount, a show-cause notice under Section 154 was issued and served upon the assessee. On the date of hearing, the assessee-company has filed a detailed reply objecting therein that deferred liability has not been added according to the Accounting Standard-22 issued by the Institute of Chartered Accountants of India and that, therefore, there is no need to rectify the book profit by adding the provision of deferred liability of taxation. I am enable to agree with the assessee for the simple reason that while calculation the book Profit all provisions including the provision for deferred liability debited to the P&L Account are added. The objection thus raised by the assessee is misconceived.
The learned assessing officer thus erroneously increased the 'book profit' by the sum of Rs. 1,14,24,000, being the 'Deferred Tax Liability' appearing in the Profit & Loss Account.
5. The assessee preferred an appeal against the above order of the learned assessing officer. The learned Commissioner (Appeals) rejected the appeal of the Assessee, stating at pages 3 and 4 of the order dated 16-11-2005, as follows:
the clear interpretation of the above language of statute under Section 115JB clearly leads to only one conclusion and there is no question of any ambiguity or having inconsistent views thereof. The only conclusion which can be arrived at on the basis of the language of Explanation 115JB is that the book profit so arrived at is to be increased by the amount of IT paid or payable and the provisions thereof, therefore, or in respect of any reservations created by whatever name called for or any amount or amounts set aside for making provisions of any unascertained liability.
The balance sheet also shows that the appellant had created provisions for taxation under 2 sub-heads:
Provision for taxation - Current (MAT) 44
- Deferred Tax Liability 114.24 Therefore, it is quite clear that Rs. 1,14,24,000 is directly attributable to the provisions of tax liability even if it is assumed that it is unascertained tax liability then definitely it may fall under 3rd sub-clause of Explanation. Hence, in view of the clear provisions of the statutes it is quite clear that the assessing officer has rightly computed the adjusted book profit under Section 115JB.
The next question relate to the applicability of Section 154. The Hon'ble Supreme Court in the case of ITO v. Bombay Dying Mfg. Co. 34 ITR 143 has clearly held that if a mistake of fact apparent from record of the assessment order can be rectified, there is no reason why a mistake of law which is glaring and obvious cannot be similarly rectified. It is also held by the Hon'ble Calcutta High Court that misreading the clear provisions of law is itself the mistake rectifiable under Section 154 [134 ITR 674 (Cal.)]. I agree with the general observation of the Learned AR that under Section 154 interpretation of statute cannot be rectified but here in the present case no interpretation of statute is involved as it has only one and single meaning. Hence, on this issue, I do not agree with the argument of the Learned AR and hold that the Learned Assessing Officer is competent and justified to invoke the provisions of Section 154 to issue rectificatory order.
6. Aggrieved by the above order of the learned Commissioner (Appeals), the assessee has preferred this appeal before the Income Tax Appellate Tribunal.
7. The assessee's threshold objection had been that in the given case, no action could have been taken under Section 154 of the Act. The provisions of Section 154 of the Act read as under:
(1) With a view to rectifying any mistake apparent from the record an Income-tax authority referred to in Section 116 may,
(a) amend any order passed by it under the provision of this Act;
(b) amend any intimation or deemed intimation under Sub-section (1) of Section 143....
The provisions of this section apply to the cases where basically there is a mistake; and when such a mistake is apparent from the records. The settled law, in view of the ruling given by the Hon'ble Supreme Court in the matter of T.S. Balaram, ITO v. Volkart Bros. , is that:
A mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long drawn process of reasoning on points on which there may conceivably be two opinions and a decision on a debatable point of law is not a mistake apparent from the record.
In the instant case neither there is a mistake at all nor there is one which could be called as obvious or patent on the face of the record. The learned assessing officer, therefore, had no jurisdiction to proceed and make an order under Section 154 of the Act. There is no glaring mistake on the face of record either as viewed by the learned Commissioner (Appeals). In any case, the learned Commissioner (Appeals) has erred in holding:
here in the present case no interpretation is involved as it has only one and single meaning. Hence on this issue I do not agree with the argument of the learned AR and hold that the learned Assessing Officer is competent and justified to invoke the provisions of Section 154 to issue rectificatory order.
At worst and for the sake of argument without so admitting, however, even if this could be viewed as a debatable issue, in view of the Supreme Court ruling in case of Volkart Bros. (supra) the matter of increasing the net profit by the amount of 'Deferred Tax Liability' for the purpose of Section 115JB of the Act, could not in any case, have been dealt with and decided by invoking the provisions of Section 154 of the Act and by passing an order under that provision, because no patent, obvious or glaring mistake apparent on the face of record as alleged, or at all, is involved. The learned Commissioner (Appeals) has erred in holding that in the present case no interpretation is involved, ignoring the fact altogether that at least there are clear views to be contrary already given by eminent experts as well as stated in the guidelines expressly and specifically laid out by the Institute of Chartered Accountants of India (ICAI). These views were of course respectfully placed by the assessee before the assessing officer as well as the Commissioner (Appeals). The learned Commissioner (Appeals) has clearly erred in holding that no interpretation is involved, and thus upholding the order under Section 154 of the Act. Clearly, the order passed by the assessing officer under Section 154 and subsequently affirmed by learned Commissioner (Appeals), is bad in law and is liable to be quashed.
8. In the present case the assessing officer and the learned Commissioner (Appeals) have apparently proceeded on an incorrect interpretation of the provisions of Section 115JB of the Act, while doing and considering the computation of 'Book Profit'. The provisions of Section 115JB give an explicit formula for computation of 'Book Profit', stipulating that the profit as per the Profit & Loss Account prepared in terms of Schedule VI of the Companies Act, 1956 needs to be increased by the items/amounts specified in Explanation under Sub-section (2) of Section 115JB, and further, that the same needs to be reduced by the items specified in the said Explanation. The list of items by which the net profit as per the profit and loss account is to be increased is specific and exhaustive. As per the settled legal principles when there is a specific and objective formula given in the statute, the same needs to be strictly interpreted and followed.
9. Both, the assessing officer as well as the learned Commissioner (Appeals) have considered the 'Deferred Tax Liability' to be falling within the ambit of Clause (a) of thesaid Explanation. Learned Commissioner (Appeals) has considered the same to be alternativelyfalling within the ambit of Clause (c) of the said Explanation. The two Clauses are reproduced herein for ready reference:
(a) the amount of income-tax paid or payable, and the provisions therefor; or
(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or.
The said item namely 'Deferred Tax Liability' is neither the income-tax 'paid' or 'payable' nor is it a 'provision' against income-tax 'paid' or 'payable'. The term 'paid' need not be explained. The term 'payable', refers to an amount which has become legally due or enforceable. It is relevant to make a reference to the Advanced Law Lexicon (Third Edition 2005), which defines the term 'payable' as follows:
The word 'payable' is a descriptive word, meaning capable of being paid, suitable to be paid; admitting or demanding payment; justly due; legally enforceable.
Where a bank issued a paper which recited that a certain person had deposited in the bank a certain sum, payable should be construed as an express promise to pay on demand.
"Due to be paid."
Further, since the 'Deferred Tax Liability' is not income-tax 'paid' or 'payable', it also cannot be considered to be a 'provision' for income-tax 'paid' or 'payable'.
9.1 The 'Deferred Tax Liability' is the amount which is to be computed as A per the prescribed method and is required to be accounted for in terms of and in accordance with the requirement of Accounting Standard-22, titled 'Accounting for Taxes on Income', issued by the Institute of Chartered Accountants of India, read with the provisions of Sub-sections (3A) to (3C) of Section 211 of the Companies Act, 1956. The said Accounting Standard prescribes the Commutation of 'Deferred Tax Liability' by taking into account the timing difference between the periods in which the tax liability becomes 'paid' or 'payable' as per law and to which the tax liability can be related with reference to the corresponding income earned. Thus, essentially the 'Deferred Tax Liability' is neither income-tax 'paid' or 'payable' nor a 'provision' against the same. It is nevertheless an ascertained 'liability' duly certified as such in terms of the legally incumbent Accounting Standards under the Companies Act. For these reasons, the amount of the 'Deferred Tax Liability' neither falls within the ambit of Clause (a) of Explanation to Sub-section (2) of Section 115JB of the Act being not "the amount of income-tax paid or payable, and the provisions therefor" nor within the ambit of Clause (c) thereof being an 'ascertained' liability. Thus the assessing officer has erred in unwarrantedly increasing the 'net profit' by the sum of Rs. 1,14,24,000, and the learned Commissioner (Appeals) in affirming such erroneous action.
Equally, incorrect is the view given by the learned Commissioner (Appeals), who stated:
alternatively it falls under Section 115JB(2)(c) i.e. the amount or amounts set aside to provisions made for meeting liabilities other than ascertained liability.
Firstly, the 'Deferred Tax liability' cannot truly fall within the ambit of the term ' provision', defined in Para 7(1)(a) of Part III of Schedule VI of the Companies Act, 1956, as follows:
'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.
The 'Deferred Tax Liability' though not an item which is to be 'paid' or 'payable' under the provisions of the Act; but is nevertheless an 'ascertained liability', computed in accordance with the prescribed method under the said Accounting Standard and is required to be accounted for in terms of the relevant provision of law. The 'Deferred Tax Liability' can be better understood as the liability, the existence as well as the quantum whereof as on the date of the Balance Sheet, is absolutely ascertained, determined and certified. In contrast, the 'provisions' are those amounts where the amount cannot be determined with substantial accuracy/ certainty. Thus where the existence as well as the amounts is certain, it does not even need to be termed as a provision.
9.2 Secondly, it basically doesn't make difference at all, by what nomenclature the assessee or for that matter anyone may call it. What has to be seen and appreciated is that substance-wise, it is a well 'ascertained' sum, a finite amount whereof is well- ascertainable; and in order to meet the sacrosanct legal requirement of revealing 'true and fair view' of the profit or loss and that of the state of affairs of a company, the same is mandated under the Companies Act to be accounted for as the 'Deferred Tax Liability'; in terms of the incumbent Accounting Standard - 22, which every company is legally obliged to follow. Therefore, even if it were called a 'provision', it is for a properly and methodically 'ascertained liability'; and as such in no case the 'Book Profit' can be increased by this sum. It is very clear that the item (c) which is part of the Explanation appearing below Sub-section (2) of Section 115JB of the Act, envisages increase of book profit by the provision made for liabilities other than 'ascertained liabilities' and not for a liability which is an 'ascertained' one. Therefore, the 'Deferred Tax Liability' do not fall within the ambit of Clause (c) which requires the 'Book Profits' to be increased by the amount or amounts set aside to provisions made for meeting liabilities other than ascertained liability.
9.3 The 'Deferred Tax Liability' thus doesn't fall either in Clause (a) or in Clause (c) of Sub-section (2) of Section 115JB.
9.4 The law requires 'Deferred Tax Liability' (DTL) to be recognised and accounted for. This situation often arises when the book profit exceeds the taxable income and, therefore, MAT is imposed. The 'Deferred Tax Liability' is on account of timing differences between the taxable income and the accounting income i.e. the book profit.
9.5 The appellant is under a legal obligation to recognise the 'Deferred Tax Liability' for all the timing differences between the taxable income and the accounting income, as per the Accounting Standard-22 issued by the Institute of Chartered Accountants of India (ICAI) which the corporate assessees are legally mandated to conform. The 'Deferred Tax Liability' so recognised and accounted for in the books would turn into Current Tax in the future years because this liability is very much an existing liability due to timing difference as explained above.
9.6 It would be interesting to consider that in future when the 'Deferred Tax Liability' would be getting converted into current tax and would then necessarily be provided for as the current tax, then of course the same would be liable to be added back to the then net profit for the purpose of levying MAT then in terms of the Clause (a) of the Explanation appended to the Section 115JB. Accordingly, if the 'Deferred Tax Liability' is added back to the book profit first at the time when it is originally accounted for, as has been erroneously done by the assessing officer and upheld by the learned Commissioner (Appeals), and then it is also added back when in future it gets converted into current tax, it would quite obviously lead to a double addition of the same substance to the net profit, though actually the 'Deferred Tax Liability' accounted for earlier would itself be turning into the current tax liability in future. Such double addition shall amount to double inclusion of the same substance leading to consequent double taxation, which is not at all tenable in law and can never be the intention of the Legislature.
9.7 In view of the foregoing, the appellant prays that increase of the net profit by adding thereto the 'Deferred Tax Liability', as done by the assessing officer and as upheld by the learned Commissioner (Appeals), be deleted.
10. It is quite pertinent to mention here the following:
(i) that the Institute of Chartered Accountants of India (ICAI), in one of its monographs entitled : 'Guidance Note On Report Under Section 115JB' has stated that in computation of book profit provision for wealth tax and deferred tax liability would not be included (P.B. 23-24).
Add: Amounts required to be added by Clauses (a) to (f) of Explanation below Section 115JB(2) : Rs....
(a) Income-tax (See Note 2) Notes:
2. Does not include provision for wealth tax and deferred tax liability"
(ii) that in one of the articles/columns entitled : 'Life (line) After AS-22 - Accounting for Taxes on Income' which appeared in ICAI's magazine 'The Chartered Accountant', the renowned Taxation experts -Sarvashree Bansi S. Mehta and Pradeep S. Shah, have given the following view:
Adjustment in respect of deferred tax is certainly not an amount of income-tax that is paid or payable, which is only a notional adjustment to mitigate a. timing mismatch. As discussed earlier, it can also not be considered a "provision". Hence, in the view of the authors, a very strong arguable case exists that the charge in respect of deferred tax for the current financial year must be allowed to stand and book profit computed allowing the charge to remain unadjusted. In other words, the book profit for the purpose of Section 115JB should be computed after considering such charge.
Chartered Accountant - March 2002, Page 1095 (PB11-20) In view of the above, the position is clear that for the purpose of Section 115JB of the Act, the net profit does not need to be increased by the amount of 'Deferred Tax Liability'.
10.1 Thus, on one hand there is a clear authentic view stated by none other than the Institute of Chartered Accountants of India (ICAI) itself; and on the other hand, countenanced by experts of the eminence as respectfully quoted. At worst, therefore, unlike as the learned Commissioner (Appeals) has viewed, one could only contend that, if anything, it is a debatable issue involving interpretation. So as already stated, the invocation of provisions of Section 154 of the Act was clearly without jurisdiction.
10.2 'Deferred Tax Liability' is accounted for in order to comply with the Accounting Standard-22 (AS) issued by the ICAI. The AS issued by the ICAI have got a statutory force as Section 209 of the Companies Act, 1956requires the same to be followed. On account of the said position of the statute, a corporate entity has to prepare its financial statements in a manner that these comply with Schedule VI of the Companies Act, 1956 as well as the Accounting Standard issued by the ICAI so that the financial statement shows the true and fair view, which is the most prime requirement of the Companies Act, 1956. There is, therefore, no way that the net profit as revealed by the assessee could be increased by the amount of the provision for 'Deferred Tax Liability'.
10.3 On this point the assessee places reliance on the Hon'ble Supreme Court's verdict in the Apollo Tyres Ltd.'s case (supra).
Gist of the verdict is as follows:
The use of the words 'in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act' was made for the limited purpose of empowering the assessing authority to rely upon the authentic statement of accounts of the Company. While so looking into the accounts of the Company, an assessing officer under the Income Tax Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinised and certified by statutory auditors and will have to be approved by the company in its general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. In spite of all these procedures contemplated under the provisions of the Companies Act, it is difficult to accept the argument of the revenue that it is still open to the assessing officer to re-scrutinise this account and satisfy himself that these accounts have been maintained in accordance with the provisions of Companies Act. Reliance placed by the revenue on Sub-section (1 A) of Section 115JB in support of the above contention is misplaced. Sub-section (1A) of Section 115J does not empower the assessing officer to embark upon a fresh inquiry in regard to the entries made in the books of account of the company. The said sub-section, as a matter of fact, mandates the company to maintain its account in accordance with the requirements of the Companies Act which mandate is bodily lifted from the Companies Act into the Income Tax Act for the limited purpose of making the said account so maintained as a basis for computing the company's income for levy of income-tax. Beyond that, the said sub-section does not empower the authority under the Income Tax Act to probe into the accounts accepted by the authorities under the Companies Act. If the statute mandates that income prepared in accordance with the Companies Act shall be deemed income for the purpose of Section 115J, then it should be that income which is acceptable to the authorities under the Companies Act. There cannot be two incomes one for the purpose of Companies Act and another for the purpose of Income-tax both maintained under the same Act. If the Legislature intended the assessing officer to reassess the company's income, then it would have stated in Section 115J that 'income of the company as accepted by the assessing officer'. In the absence of the same and on the language of Section 115J, it will have to held that view taken by the Tribunal is correct and the High Court has erred in reversing the said view of the Tribunal. Therefore, the assessing officer while computing the income under Section 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The assessing officer thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the assessing officer does not have the jurisdiction to go behind the net profit shown in the P&L a/c except to the extent provided in the Explanation to Section 115J.CIT v. Apollo Tyres Ltd. (1998) 149 CTR (Ker.) 538; (1999) 237 ITR 708 (Ker.) : TC S34.2490 set aside.
Conclusion:
While assessing a company for income-tax under Section 115J the corredness of the P&L a/ c prepared by the assessee-company and certified by the statutory auditors of the company as having been prepared in accordance with the requirements of Parts II and III of Schedule VI to the Companies Act cannot be examined by the assessing officer; assessing officer does not have the jurisdiction to go behind the net profit shown in the P&L a/c except to the extent provided in the Explanation to Section 115J.
It may be germane to the issue in the present case, to consider the view given by the ITAT, Special Bench in case of Joint CIT v. Usha Martin Industries Ltd. held as under:
The provision for bad and doubtful debts debited to the profit and loss account can be added back to the net profit if it falls within any of the items provided in the Explanation.
For the case to fall within item (c) of the Explanation to Section 115JA, (i) the amount must be set aside to any provision, (ii) the provision should be made for meeting a liability and (iii) the provision should be for other than an ascertained liability. All these three ingredients should be satisfied so as to bring the provision within the ambit of item (c) of the Explanation to Section 115JA. A 'provision' can be any amount written off or retained by way of providing for (i) depreciation, (ii) renewals, (iii) diminution in the value of assets or (iv) for any known liability of which the amount cannot be determined with substantial accuracy. The provision for bad and doubtful debts is made when the assessee is of the opinion that its entire debt may not be realised and part of the debt may become irrecoverable. For example, where in the accounts of an assessee there are outstanding debts in the names of several parties totalling Rs. 1 crore, and the assessee being of the opinion that only 90 per cent of the debts would be realised, makes a provision for Rs. 10 lakhs for bad and doubtful debts, by making this provision, the assessee is valuing its asset, i.e., the debt, at Rs. 90 lakhs, as against the book figure of Rs. 1 crore. The provision is made to cover the probable diminution in the value of the asset, i.e., the debt which is receivable by the assessee. The provision for bad and doubtful debts cannot be said to be a provision for a liability because even if the debt were not recovered, no liability would be fastened upon the assessee. Any provision towards irrecoverability to a debt cannot be said to be a provision for a liability. Hence, the question whether it is an ascertained or unascertained liability does not arise. Therefore, Clause (c) of the Explanation to Section 115JA would not be applicable in respect of provision for bad and doubtful debts. In the Explanation to Section 115JA, there was no provision for making addition with regard to any provision for wealth-tax. The provision for wealth-tax does not fall within any of the items of the Explanation to Section 115JA and the deletion of the addition of Rs. 1,25,000 was justified.
11. From the illustration dealt with and the view taken in the above matter by the said Special Bench, what becomes clearer is that in arriving at the figure of book profit for the purpose of levying the Minimum Alternate Taxunder the special provisions of Section 115JB, the assessing officer is only required to follow the dictates specifically laid down in the said section and the Explanation appended thereto. The Apex Court's verdict in the Apollo Tyres' matter lays down clearly that there is no room for assuming discretion to read more than what is expressly stated in the said provision; and to try to enhance, dilate or extend the scope of the items specifically enumerated in the said Explanation. 'Deferred Tax Liability' is not covered under any of the items of the Explanation and as such addition thereof has to be deleted. This is accounted for to comply with the AS-22 and the provisions of the Companies Act. There is nothing in the Income Tax Act, which requires this to be added to net profit for the limited purpose of levying MAT under Section 115JB.
12. The learned D/R on the other hand justified the first appellate order with the submission that provision laid down under Section 115JB was clear, hence, there was no substance in the contention of the assessee that issue was debatable one, hence provisions of Section 154 were not attracted.
13. After considering the arguments advanced by the parties, we find substance in the contention of the learned A/R. The provisions laid down under Section 115JB are clear wherein under Clauses (a) to (c) of the Explanation 'book profit' for the purpose of Section 115JB has been defined as the net profit as shown in the Profit & Loss account for the relevant previous year prepared under Sub-section (2) has increased by:
(a) The amount of income-tax paid or payable, and the provision there for; or
(b) The amounts carried to any reserve, by whatever name called ; or
(c) The amount or amounts set aside to provisions made for meetingliabilities, other than ascertained liabilities; or Thus it is clear that as per Explanations (a) to (c) to Section 115JB of the Act, the book profit so arrived at is to be increased by the amount of income-tax paid or payable and the provisions thereof, therefore, or in respect of any reservations created by whatever name called for on any amount or amounts set aside for making provision for unascertained liability. As per the first appellate order the assessee had computed amount of Rs. 1,14,24,000 as deferred tax liability as under:
Particulars For the year 2001 -02 Timing Difference Tax effect (Rs. in lakhs) Diff. of Depreciation (F.Y. 2001-02) 3,20,00,000 1,14,24,000 Depreciation as per IT. Act 8,15,00,000 Depreciation as per Companies Act 4,95,00,000 Total:
3,20,00,000 1,14,24,000 The learned Commissioner (Appeals) has also observed that in the balance sheet, the assessee had created provision for taxation under two sub-heads:
Provision for taxation - Current (MAT)44
- Deferred Tax liability 114.24 These facts have not been disputed before the Tribunal. From the above detailed submissions of the learned A/R supported by the requirement of Accounting Standard-22 titled "Accounting for taxes on Income" issued by the Institute of Chartered Accountants of India, read with the provisions of Sub-sections (3A) to (3C) of Section 211 of the Companies Act, 1956 and the decisions relied upon by the learned A/R, we are of the view that the issue as to whether the 'deferred tax liability' will fall within the ambit of Clause (a) or Clause (c) to the Explanation to Section 115B(2) is debatable one and thus the assessing officer was not justified in invoking the provisions of Section 154 of the Act to include the sum of Rs. 1,14,24,000 being the 'deferred tax liability' appearing in the Profit & Loss account in the book profit. With the above submissions, the learned A/R has tried to establish that the 'deferred tax liability' though not an item which is to be paid or payable under the provisions of the Act, but is nevertheless an ascertained liability, computed in accordance with the prescribed method under the said Accounting Standard-22 and is required to be accounted for in terms of relevant provisions of law. We find substance in the submission of the learned A/R that the deferred tax liability can be better understood as the liability, the existence as well as the quantum whereof as on the date of the balance sheet, is absolutely ascertained, determined and certified. In contrast, the 'provisions' are those amounts where the amount cannot be determined with substantial accuracy/certainty. Thus where the existence as well as the amounts is certain, it does not even need to be termed as a provision. The meaning of the provisions laid down under Section 115JB are not clear towards the very nature of 'deferred tax liability' to be included in the book profit, the mistake as has been attempted by the assessing officer is certainly cannot be termed as apparent one to allow the assessing officer to rectify the same by invoking the provisions of Section 154 of the Act. Since the interpretation of the provision was involved in the matter, the assessing officer was thus also not justified in invoking the provisions of Section 154 of the Act. We are thus of the definite view that the matter of increasing the net profit by the amount of different tax liability for the purpose of Section 115JB of the Act in the present case could not in any case have been dealt with and decided by invoking the provisions of Section 154 of the Act and by passing an order under that provision, because no patent, obvious or glaring mistake on the face of record as alleged was involved. The learned Commissioner (Appeals) has thus erred in holding that in the present case no interpretation is involved, ignoring the material fact altogether that at least there are clear views to be contrary already stated in the guidelines expressly and specifically laid out by the Institute of hartered Accountants of India (ICAI). Admittedly these views were placed by the assessee before the lower authorities. Under these circumstances, we set aside the order passed under Section 154 of the Act by the assessing officer which was beyond his jurisdiction as discussed hereinabove, in turn the first appellate order upholding the impugned action of the assessing officer is also set aside. The assessing officer, as discussed above, did not agree with the assessee that deferred liability has not been added according to the accounting standard 22 issued by the Institute of Chartered Accountants of India. The lower authorities have considered the "deferred tax liability" to be falling within the ambit of Clause (a) of the said Explanation. The learned Commissioner (Appeals) has further considered the same to be alternatively falling within the ambit of Clause (c) of the said Explanation. The Accounting Standard-22 titled as 'Accounting for taxes on Income' issued by the Institute of Chartered Accountants of India, prescribes the computation of deferred tax liability by taking into account the timing difference between the periods in which the tax liability becomes 'paid' or 'payable' as per law and to which the tax liability can be related with reference to the corresponding income earned. The deferred tax liability is the amount which is to be computed as per the prescribed method and is required to be accounted for in terms of and in accordance with the requirement of Accounting Standard-22 for 'Accounting for taxes on income', read with the provisions of Sub-sections (3A) to (3C) of Section 211 of the Companies Act, 1956. The deferred tax liability is neither income-tax 'paid' or 'payable' nor a 'provision' against the same. The deferred tax liability so recognized and accounted for in the books would turn into current tax in the future years because this liability is very much an existing liability due to timing difference. It is nevertheless an ascertained liability duly certified as such in terms of the legally incumbent Accounting Standards under the Companies Act. We also find substance in the submission of the learned A/R that in future when the deferred tax liability would be getting converted into current tax and would then necessarily be provided for as the current tax, then of course the same would be liable to be added back to the then net profit for the purpose of levying MAT then in terms of the Clause (a) of the Explanation to Section 115JB. Accordingly, if the Deferred Tax Liability is added back to the book profit first at the time when it is originally accounted for, as has been done by the lower authorities and then it is also added back when in future it gets converted into current tax, it would obviously lead to a double addition of the same substance to the net profit, though actually the deferred tax liability accounted for earlier would itself be turning into the current tax liability in future. A copy of Accounting Standard-22 has been filed by the learned A/R, which every company is legally obliged to follow. We find substance in this contention of learned A/R that even if the deferred tax liability, as discussed above in the submission of the learned A/R, were called a 'provision', it is for a properly and methodically 'ascertained liability', and as such in no case the book profit can be increased by this sum. The item (c) which is part of the Explanation appearing below Sub-section (2) of Section 115JB of the Act, envisages increase of book profit by the provision made for liabilities other than ascertained liabilities and not for a liability which is an ascertained one. We, thus, are of the view that the deferred tax liability do not fall within the ambit of Clause (c) which requires the book profit to be increased by the amount or amounts set aside to provisions made for meeting the liabilities other than ascertained liability. The amount of the deferred tax liability neither falls within the ambit of Clause (a) of Explanation to Sub-section (2) of Section 115JB of the Act being not the amount of income-tax paid or payable and the provisions there for nor within the ambit of Clause (c) thereof being an ascertained liability. The learned Commissioner (Appeals) was also not correct in coming to the conclusion that alternatively it falls under Section 115JB(2)(c) i.e., the amount or amounts set aside to provisions made for meeting liabilities other than ascertained liability. The reason being that deferred tax liability cannot fall within the ambit of the term "provision", defined in para 7(1)(a) of Part-Ill of Schedule VI of the Companies Act, 1956 which reads as "'provision' shall, subject to subclause (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". The deferred tax liability though not an item which is to be 'paid' or 'payable' under the provisions of the Act, but is nevertheless an 'ascertained liability', computed in accordance with the prescribed method under the said Accounting Standard and is required to be accounted for in terms of the relevant provision of law. The deferred tax liability can be thus better understood as the liability, the existence as well as quantum whereof as on the date of the Balance Sheet, is absolutely ascertained, determined and certified. On the contrary, the provisions are those amounts where the amount cannot be determined with substantial accuracy/certainty. Therefore, where the existence as well as the amounts is certain, it does not even need to be termed as a provision. Adjustment in respect of deferred tax is certainly not an amount of income-tax that is paid or payable, which is only a notional adjustment to mitigate a timing mismatch. As discussed above, it can also not be considered as a "provision". The charge in respect of deferred tax for the current financial year, therefore, may be allowed to stand and book profit computed allowing the charge to remain unadjusted. In other words, the book profit for the purpose of Section 115JB should be computed after considering such charge. We, thus, come to this conclusion that for the purpose of Section 115JB of the Act, the net profit does not need to be increased by the amount of deferred tax liability. The action of the lower authorities in this regard was accordingly not justified.
13.1 In the case of Apollo Tyres Ltd. (supra) relied upon by the learned A/R, the Hon'ble Supreme Court was pleased to hold that the assessing officer while computing the income under Section 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The assessing officer thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the assessing officer does not have the jurisdiction to go behind the net profit shown in the Profit & Loss Account except to the extent provided in the Explanation to Section 115J. The ratio laid down in this decision of Hon'ble Supreme Court is that while assessing a company for income-tax under Section 115J, the correctness of the profit and loss account prepared by the assessee and certified by the statutory auditors of the company as having been prepared in accordance with the requirements of Parts-II and III of Schedule VI to the Companies Act cannot be examined by the assessing officer, the assessing officer does not have the jurisdiction to go behind the net profits shown in the Profit & Loss Account except to the extent provided in the Explanation to Section 115J. Similar ratio has been arrived at by the Special Bench of the Tribunal in the case of Usha Martin Industries Ltd. (supra) holding that the provision for bad and doubtful debts debited to the Profit & Loss Account can be added back to the net profit if it falls within any of the items provided in the Explanation. We, as discussed above, are thus of the view that the deferred tax liability in question does not fall within any of the items provided in the Explanation A to Sub-section (2) to Section 1 ) 5JB of the Act, hence the assessing officer was not justified in increasing the book profit by the sum of Rs. 1,14,24,000 being the deferred tax liability appearing in the Profit & Loss Account. The Learned Commissioner (Appeals) has also erred in sustaining the same. We thus while setting aside orders of the lower authorities on the issue, direct the assessing officer to delete the addition of Rs. 1,14,24,000 so made. The ground Nos. 1 & 2 of the appeal are thus allowed in favour of the assessee.
14. In the result, appeal is allowed.