SARA INTERNATIONAL PRIVATE LIMITED,NEW DELHI vs. ACIT CIRCLE 22(1), NEW DELHI

Aggrieved, assessee preferred an appeal before the ld. CIT (A) and filed detailed submissions. After considering the detailed submissions of the assessee, ld. CIT (A) sustained the addition made by the Assessing Officer by observing as under :- “7.2.1 Considering the findings of AO and details/documents made available during this appellate proceeding, I am constrained to concur with the AO's observation. The fact of the matter is that the appellant had not debited prior period expenses in its P&L account as evident from assessment order and the submissions of the appellant and without the same being debited to P&L account, it cannot be deducted for the purpose of MAT computation as per the Act, as rightly held by AO. 7.3 Further, the appellant in its submission has harped on the decision of its -Jurisdictional High Court (Delhi) in CIT v Khaitan Chemicals & Fertilizers Ltd. [307 ITR 150] pronounced in 2008, where the Court held that prior period expenses/items below the line are a part of the profit and loss account of the company and thus, such expenses below the line are to be considered for the purpose of MAT assessment. However, the Assessing Officer has relied on the judgement of Hon'ble Kerela High Court in the case of Sree Bhagawathy Textiles vs CIT (2011) 199 Taxman 14 (Kerela), wherein the Court observed that "Prior period expenses is not an item that can be deducted from profit in terms of any clauses covered by Explanation to Section 115JA and therefore, the same cannot be allowed as deduction in MAT assessment.". 7.4 As per the decision of Hon'ble Karnataka High Court in the case of CIT v. GMR Industries Ltd., [2020]425 ITR 504, wherein it was held that prior period expenses charged to profit and loss account cannot be deducted from the profit of the year for the purpose of computing book profit under Section 115JB of the Act .But in the instant case the appellant had not debited prior period expenses in its P&L account as evident from assessment order and the submissions of P&L account, it cannot be deducted for the purpose of MAT computation as per the Act. 7.5 Hence, in view of the foregoing discussion, my stance coincides with the ruling of Hon'ble Kerala High Court and Karnataka High court on this issue and acceding to the same, the addition made by the AO is hereby, upheld and thus, Ground No.1 of the appellant is dismissed.”

Aggrieved, assessee is in appeal before us raising following grounds of appeal :- “The Learned Commissioner of Income Tax Appeals (NFAC) has erred in law and on facts in confirming an addition of Rs.2,14,05,190/- made by the Assessing Officer to the Book profits of the company u/s 115JB of the Income Tax Act, on account of prior period items, with total disregard to the facts and circumstances of the case.”

At the time of hearing, ld. AR of the assessee submitted that the prior period expenses is part of the book profit declared by the assessee and submitted that the assessee has adjusted the prior period expenditure and for the purpose of section 115JB provided to be considered is the profit before tax as per the Profit & Loss account declared by the assessee. In this issue, he submitted that it is a covered issue as held by Hon’ble Delhi High Court in the case of CIT, Delhi-II vs. Khaitan Chemicals & Fertilizers Ltd. (2008) 307 ITR 150 and Hon’ble Bombay High Court in the case of Mahindra & Mahindra Ltd. vs. CIT in order dated 02.05.2025 and he heavily relied on Hon’ble Delhi High Court in the case of Khaitan Chemicals & Fertilizers Ltd. (supra).

On the other hand, ld. DR of the Revenue relied on the findings of the lower authorities and specifically brought to our notice para 7.3 and 7.4 of the appellate order.

Considered the rival submissions and material placed on record. We observe that for the purpose of regular computation of income, assessee has disallowed prior period expenditure whereas for the purpose of taxation u/s 115JB assessee has taken the profit before tax as per the Profit & Loss account, however the Assessing Officer rejected the same and added the prior period expenditure to tax under MAT. After considering the submissions of both the parties, we observed that the Hon’ble Delhi High Court in the case of Khaitan Chemicals & Fertilizers Ltd. (supra) held as under :- “10. Having heard the counsel for the parties, we are of the view that the question which arises in this appeal has to be decided in the affirmative. This means that the Income-tax Appellate Tribunal was correct in law in holding that the Assessing Officer had failed to appreciate that the net profit for the purposes of Section 115 JA of the said Act was to be computed only after deducting the prior period expenses / extraordinary items. We feel that the fundamental flaw that entered into the Assessing Officer’s approach was that he was under an impression that the assessee was claiming a reduction in the net profit The assessee had all along contended that the net profit was to be computed on the basis of the profit and loss account which, in turn, was to be in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act. Such a computation of net profit, in view of the prescribed Accounting Standard (AS 5), required the prior period expenses / extraordinary items to be shown separately. This did not mean that because these items were shown separately, they did not constitute part of net profit. Paragraph 5 of the Accounting Standard (AS 5), which has been extracted above, specifically requires that all items of income and expenses which are “recognised in a period” should be included in the determination of net profit or loss for the period unless an accounting standard requires or permits otherwise. We have already extracted the definition of prior period items as given in AS 5. It 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 statements of one or more prior periods. Therefore, the income or expenses relatable to prior period items are those which arise in the current period, i.e., the period relevant for the purposes of computing the net profit or loss. Clearly, prior period items are to be included in the determination of net profit or loss. Furthermore, paragraph 7 of AS 5 stipulates that the net profit or loss, inter alia, comprises of extraordinary items and the same From this, it is clear that both, „prior period items‟ as well as „extraordinary items‟ are to be included in the determination of net profit or loss. If a prior period item is an expense, it is obvious that it will go towards reducing the net profit or increasing the loss, as the case may be. On the other hand, if the prior period item is an income, it would go towards increasing the net profit or reducing the loss, as the case may be. The same is the position with extraordinary items which may be income or expenses. The conclusion that one can arrive at from this discussion is that prior period items and extraordinary items form part of the net profit or loss.

Paragraph 15 of AS 5, which has been extracted earlier, makes it clear that the nature and amount of prior period items should be separately disclosed in the statement of profit and loss in a manner that their impact on the “current” profit or loss can be perceived. Two approaches have been indicated in paragraph 19 of the said accounting standard (AS 5). The normal approach is to include prior period items in the determination of net profit or loss for the current period. The alternative approach is to show such items in the statement of profit and loss after determination of current net profit or loss. As indicated in the accounting standard, in either case, the objective is to indicate the effect of such items on the current profit or loss. It is obvious that by the assessee in view of the provisions of Section 115 JA (2) read with Section 211 of the Companies Act, 1956, the assessee was required to show the prior period items / extraordinary items separately so that their impact on the current profit or loss could be perceived. The fact that the assessee adopted the alternative approach of showing such items in the statement of profit and loss after determination of current net profit or loss, does not mean that these items are not to be taken into account in computing net profit as envisaged in Section 115 JA of the said Act. Thus, what the assessee had done was only to indicate prior period items / extraordinary items separately. This did not mean that the figure of net profit was to be arrived at de hors these items.

The foregoing discussion makes it clear that these items were components of net profit as shown in the profit and loss account prepared under Section 115 JA (2). The assessee was not claiming any reduction in the net profit on the basis of any of the clauses appearing in the Explanation. The assessee’s claim was that the prior period items / extraordinary items were, in any event, subsumed in the computation of net profit. It is only that they were to be shown separately so that their impact on the current net profit or loss could be perceived.

In view of this discussion, the question is answered in the affirmative and against the revenue. The decision of the Income-tax Appellate Tribunal is upheld and the appeal is dismissed.”

Respectfully following the aforesaid decision, the Hon’ble High Court has addressed all the issues raised by the lower authorities and also the lower authorities had relied on the decision of the other Hon’ble High Court. However, the jurisdictional High Court decision is binding on us. Therefore, we are inclined to allow the grounds raised