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Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SHRI GEORGE GEORGE K & MS. PADMAVATHY S
O R D E R Per Padmavathy S, Accountant Member
This appeal by the assessee is directed against the order of the Commissioner of Income Tax (Appeals) - 9, Bengaluru dated 21/09/2020 passed u/s. 250 of the Income-tax Act 1961 (the Act) for the assessment year 2012-13.
The grounds raised by the assessee for the purpose of this appeal are with respect to disallowance of deduction u/s 80JJAA of the Act (Ground No.2) and additions made to book profits u/s 115JB of the Act (Ground No.3). Ground No.1 is general ground and Ground 4 and 5 are consequential nature.
Brief facts of the case are that the assessee is a 100% export oriented undertaking and is engaged in the business of manufacturing and export of premium denim based garments. For the assessment year 2012-13, the assessee filed its return of income on 22.12.2012 declaring a total income of Rs. 77,13,73,910/- after claiming a deduction of Rs. 94 under Section 80JJAA of the Act. As per the return of income, the tax payable under Section 115JB of the Act was Rs. 15,58,95,950/- as against the tax payable of Rs. 25,02,72,265/- under the normal provisions of the Act. Since the tax payable under the normal provisions of the Act was higher than the tax payable under Section 115JB of the Act, the assessee paid taxes under the normal provisions of the Act
The return was selected for scrutiny and during the course of assessment, the assessee made a revised claim of deduction under Section 80JJAA amounting to Rs. 7,99,50,456/- before the Assessing Officer, stating that in the return of income filed, inadvertently the claim of deduction under section 80JJAA was made for Rs. 94/- as against Rs, 7,99,50,456/-. An order dated 27.11.2014 was passed under section 143(3) of the Act wherein, the AO denied the original as well as the revised claim for deduction under Section 80JJAA of the Act. The Assessing Officer further computed the tax liability under Section 115JB by adding back an amount of Rs. 1,84,35,007/- on account of gratuity, Rs. 75,43,271/- on account of leave encashment and Rs, 5,13,20,045/- on account of bonus to the book profits of the assessee by classifying the same as unascertained and contingent liability.
Aggrieved by the order of the AO the assessee preferred an appeal before the CIT(A) who confirmed the order of the AO.
The assessee has preferred this appeal aggrieved by the order of the CIT(A)
We will first consider the issue of disallowance of deduction u/s 80JJAA of the Act. The assessee while filing the return of income has claimed deduction of Rs.94/- u/s 80JJAA of the Act. During the course of asst. proceedings, the assessee revised the claim u/s 80JJAA of the Act to Rs.7,99,50,456/-stating that in the return of income the deduction was inadvertently claimed as Rs.94
The AO rejected deduction under section 80JJAA stating following reasons: -
i) The Assessee did not file a revised return to claim deduction under section 80JJAA of the Act and any claim made can be allowed only by way of a revised return and not otherwise; ii) Form 10DA was prepared on 21 February 2014 i.e., subsequent to the filing of return of income for AY 2012- 13 and hence, the claim made is not in accordance with provisions of section 80JJAA(2); and iii) The Assessee was formed by way of splitting up and reconstruction and the Assessee failed to produce evidence to prove the contrary. iv) The assessee had not considered the exclusion of 100 workman as per clause (i) of the explanation to section 80JJAA v) The assessee had included the workman recruited in the previous financial year i.e. 2010-11, but completed 300 working days during the previous year relevant to assessment year 2012-13 for the purpose of deduction under section 80JJAA which was not acceptable
The CIT (A) confirmed the order passed by the AO on merits and by placing reliance on the decision of Hon’ble Supreme Court in the case of Goetze (India) Ltd v CIT 284 ITR 323 (SC)
The Ld AR argued before us against each of the contentions mentioned in the order of the AO as well as CIT(A) and the Ld DR made counter submissions wherever he wanted to bring any additional points for our consideration.
We have heard both the parties and perused the materials on record. We will consider each of the points contended here in the following paragraphs
The Ld.AR submitted that a lawfully permissible deduction cannot be denied basis that the same was not claimed through a revised return u/s.139(1) of the Act. The Ld AR also submitted that in fact, in the present case, the assessee did make a claim in the original return but for a wrong amount which was rectified during the course of the asst. proceedings. The Ld.AR further submitted that there are many judicial pronouncements including those rendered by the coordinate bench of Bangalore Tribunal. The Ld AR brought to our notice the decision of WIPRO Ltd., Vs. DCIT (2015) 62 taxmann.com 26 (Kar) and the CBDT Circular No.14(XL-35) dated 11/4/1955.
The Ld. DR relied on the order of IT authorities.
With regard to the question whether the assessee can claim for a lawful deduction which was not claimed in the return of income filed u/s 139(1) during the course of assessment, this issue is well settled now and there are plethora of judgments discussing this issue where it has been held that the assessee cannot be denied the deduction. The courts have clearly brought out the distinction between a fresh claim and revised claim.
In the case of PCIT vs E-Funds International India Pvt Ltd, [2015] 379 ITR 292 (Del) this principle of assessee making a revision to the original claim and not fresh claim is clearly laid out by the Hon’ble Delhi High Court. The assessee in E-Funds International (supra) through a letter filed before the AO submitted a revised computation for the claim u/s.80HHE. The Delhi Hon’ble High Court in this case held that “The Court noted that "Courts have taken a pragmatic view and not a technical view as what is required to be determined is the taxable income of the Assessee in accordance with law." In Influence v. Commissioner of Income Tax (supra) a similar approach was adopted when the AO in that case refused to accept the revised computation submitted beyond the time limit for filing the revised return under Section 139(5) of the Act. This Court noted that the decision in Goetze (India) Ltd. (supra) "would not apply if the Assessee had not made a new claim but had asked for re-computation of the deduction."
Therefore the principle laid down by the Hon’ble Apex Court in the case of Goetz India (Supra) will not have application on the facts of the instance case since the assessee had already made a claim u/s.80JJAA of the Act in the original return filed. Further, the jurisdictional High Court in the case of WIPRO Ltd., (Supra) has held in this context that “71 It was contended on behalf of the revenue that, no revised return was filed by the assessee under section 139 (5) of the Act claiming the relief under Section 90 of the Act read with Double Taxation Avoidance Agreement. Only a letter claiming the said relief was filed before assessment and the same cannot be taken into consideration.
Section 139(5) of the Act provides that, if any person, having furnished a return under sub-section (1), or in pursuance of a notice issued under sub-section (1) of Section 142, discovers any omission or any wrong statement therein, he may furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier. The said provision refers to a return under sub- section (1). Sub-section (1) of Section 139 provides for filing of a return of income on or before the due date, furnishing a return of his income or the income of such other person during the previous year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed. If in such return the assessee discovers any omission or any wrong statements therein which has to be necessarily with reference to his income and if it is sought to be corrected, then it could be done only by resorting to a revised return under Section 139(5) of the Act. The income contemplated by Section 139(1) of the Act can only be the income which the assessee bona fide believes to be his income and not the income as finally assessed by the assessing officer. On the discovery of omission or wrong statement in the earlier return filed by the assessee he can safely file a revised return without recourse to the assessing officer in any way. Once such a revised return is filed under Section 139 (5), the effective return for the purpose of the assessment is thus the return which is ultimately filed by the assessee on the basis of which he wants his income to be assessed. In this context one should notice the issue on hand is not with regard to a claim that would vary the income of the assessee. The issue is with regard to allowing a credit on account of tax paid outside India in respect of which particulars were furnished to the assessing authority during the course of assessment proceedings before the assessment is passed. It is bound to be entertained and dealt with on merits. Once the return is filed and the income tax officer commences the assessment proceedings, the assessing authority is not the tax payer's opponent, in the strictly procedural sense of the term. The assessment functioning involves the adjustment of the tax liability of the assessee in accordance with the facts on record and in accordance with the law laid down by the legislature. The assessment is nothing but another name for adjustment of the tax liability to accord with the taxable event in the particular tax payer's case. While determining the tax liability of the assessee, the assessing authority shall allow the credit for all prepaid taxes referred to in Section 234B, Assessing officer to make available to the assessee any legitimate and legal tax relief to which the assessee is entitled, but has omitted to claim for one reason or another. Merely because the assessee in the return filed under Section 139(1) has not put forth a claim for relief, he cannot be estopped in getting the tax relief if he is entitled to in law. The omission in the return filed under Section 139 (1) of the Act is not about non-disclosing of income. Income is disclosed. The omission is claiming tax relief out of the income which the assessee is entitled to under Section 1OA of the Act. Realizing this mistake before the assessment proceedings concluded, the assessee has filed a letter pitting forth such claim. Therefore, the assessing authority is legally bound to take into consideration the said letter where the assessee is claiming tax credit/relief and decide whether the assessee is entitled to such relief out of the tax liability on the total income in respect of which he has filed the return under Section 139(1) of the Act. As the tax liability is fastened on the assessee on the basis of the statutory provisions, if any statutory provision gives the assessee the tax benefit, the assessing authority is legally bound to consider the same and grant him relief. In the course of assessment the said claim cannot be rejected on the ground that the same is not made in the return filed under Section 139(1) and on the ground that no revised return is filed under Section 139(5) of the Act. What the assessee is claiming by way of a letter is to bring to notice of the assessing authority the statutory provisions as well as the provisions of the Double Taxation Avoidance Agreement under which the assessee is entitled to claim tax benefit, as the said benefit of tax was not claimed in the return filed under Section 139(1) of the Act. Once the assessee files the necessary particulars and claims relief under the provisions of the Double Taxation Avoidance Agreement, the limitation placed by domestic law would yield to the tax relief provided for under the Double Taxation Avoidance Agreement. Therefore, the assessing authority was not justified in rejecting the said claim on the ground that no revised return is filed under Section 139(5) of the Act. In fact, probably the assessing authority was conscious that it is not a valid ground to reject the claim, he proceeded to consider the claim of the assessee on merits and has rejected the claim on merits also.
In view of the aforesaid discussions, the said substantial question of law is answered in favour of the assessee and against the revenue and the assessee is entitled to the tax benefit to the extent set out above).”
In the light of the various judicial pronouncements, we hold that the assessee’s claim for 80JJAA for an amount of Rs.7,99,50,456/- need to be considered by the AO subject to the allowability of the claim on merits
With regard to non filing for Form 10DA, the Ld.AR submitted that in the assessment year under consideration under Rule 12(2) of the Income-tax Act Rules 1962, the assessee was not required to furnish a copy of the Accountant’s report at the time of filing of the return of income and that there was no provision to submit the Form 10DA through online portal. The Ld.AR therefore submitted that the assessee cannot be denied of a deduction which he is lawfully entitled o on the basis of functioning of the Income-tax portal. The Ld.AR brought to our attention that the Form 10DA was filed on 12/09/2012, which date was wrongly mentioned as 21/02/2014 in the asst. order. The Ld.AR placed reliance on various judicial pronouncements to reiterate that the requirement for furnishing of the accountant’s report would stand satisfied if the same is furnished during the course of the asst.
The Ld DR supported the orders of the lower authorities.
We heard both the parties and perused the materials on record. The proviso to Rule 12(2) was inserted effective from 01.04.2013, whereby the assessee was required to file the report electronically and prior to the amendment, there was not any provision to file the form electronically and hence the same could not be filed along with the return of income. The courts have consistently held that requirement of filing the auditors report is a directory requirement and that hence would stand satisfied if the accountant’s report is furnished during the course of the assessment. The Allahabad High Court in the case of PCIT vs Surya Merchants (2016) 72 taxmann.com 16 (Allahabad) held that “19. In CIT v. Web Commerce (India) (P.) Ltd. 120091 318 ITR 135/178 Taxman 310 (Delhi) the Delhi High Court examined the provisions of sub-section 1OB(5) of the Act, which is similar to the provisions of sub-section 801A(7) and Section 80J(6A) of the Act and observed, after placing reliance upon its earlier decisions in Contimeters Electricals (P.) Lid. (supra), that the provisions are directory and the requirement of the report of the accountant to be filed with the return of the income would stand satisfied if it is submitted before the assessment order is passed.
The aforesaid decisions leave no manner of doubt that the requirement of sub-section (7) of Section 801A of the Act, which is made applicable to section 801B of the Act in view of the provisions of sub-section (13) of Section 801B of the Act, that the audit report should be furnished along with the return
of income is a directory requirement and would stand satisfied if the audit report is furnished during the course of the assessment proceedings.”
Similar view is taken by the jurisdictional High Court in the case of CIT vs ACE Multtaxes Systems (P) Ltd (2009) 317 ITR 207 (Karnataka). We place reliance on the judicial pronouncements and hold that the assessee should be allowed the deduction u/s.80JJAA since the Form 10DA was filed during the course of the assessment.
The Ld.DR during the course of the hearing brought to our attention that the amount mentioned in Form 10DA for the asst. year 2012-13 does not match with the amount actually claimed by the assessee for the said asst. year. To this the Ld AR clarified that the amount mentioned in Form 10DA i..e. Rs.3,78,70,242 is the eligible deduction with respect to new workmen employed during the year relevant to AY 2012-13 only. The provisions of section 80JJAA allows for deduction over a period of 3 years and hence the amount claimed u/s.80JJAA i.e.Rs.7,99,50,457 is the aggregate claim including workmen employed in AY 2010-11 and 2011-12. Since the Ld DR did not have any further objection there is no requirement for any adjudication on this matter.
For the next contention that the undertaking of the assessee was formed by way of splitting up or reconstruction, the Ld AR brought to our notice that in assessee's own case in the context of deduction under section 10B, for assessment years 2007-08 to 2010-11, the coordinate bench of the Bangalore Tribunal gave a finding that the assessee was not formed by splitting up or reconstruction. This decision of the Hon'ble Tribunal has been affirmed by the Hon'ble High Court of Karnataka in and connected matters. Further, the Special Leave Petition filed by the Revenue against the aforesaid judgment of the Hon'ble High Court has been dismissed by the Hon'ble Supreme Court in SLP(Diary) No. 10057/2021. The Ld AR, therefore, submitted that, the fact that the assessee has not been formed by way of splitting up or reconstruction has attained finality.
20. The Ld.DR submitted that the decision of the Hon’ble Karnataka High Court in assessee’s own case (supra) in the contest of sec. 10B of splitting of reconstruction cannot be applied for the purpose of sec.80JJAA of the Act.
We heard the rival submissions. We notice that the question of whether the assessee was formed by way of splitting up or reconstruction has reached finality and the decision of the coordinate Bench of this Tribunal is upheld by the Hon’ble Karnataka High Court and the SLP filed by Revenue is dismissed by the Supreme Court. For reference in this context the extract from the order of the Tribunal is reproduced below “6. Having heard the rival contentions and having considered the material on record, we find that the CIT(A) has considered the issue at length and has come to the conclusion that there was no transfer of old plant and machinery during the financial year 2004-05, 2005-06 and 2006-07 and further that the plant and machinery purchased by the assessee from FFIPL in the financial year 2007-08 also did not exceed 20% of the total plant and machinery of the assessee during the said financial year. He further observed that since there was no purchase of old plant and machinery from FFIPL in the earlier assessment year even as per contemporaneous records of the EOU/Customs authorities. The relevant date of the plant and machinery purchased by the assessee over the years is reproduced at para 1.2.3, page 30 of the order of the CIT(A). Thus, CIT(A) held that the manufacturing activity carried on by the assessee In the assessment years earlier to assessment year 200809 was by use of new plant and machinery. As regards the transfer of business premises, employees and the customers of FFIPL to the assessee, the CIT(A) observed that there was no prohibition in the use of the business premises of FFIPL by the. assessee and also of the employees and customers of FFIPL and further that the transfer of employees and customers of the assessee was only a small percentage of the total employees and customers of the assessee respectively. Thus holding, the CIT(A) set aside the finding of the AD and allowed the deduction u/s lOB of the Act. We find that the CIT(A) has given elaborate reasons for coming to the conclusion and that the learned Departmental Representative has not been able to rebut any of the findings of the CIT(A) with any evidence to the contrary. Since the findings of the CIT(A) are based upon the evidence produced by the assessee which has not been rebutted by the revenue, we do not see any reason to interfere with the order of the CIT(A). Thus, appeal is dismissed.”
On the argument that the decision taken u/s 10B of the Act cannot be applied for allowing deduction u/s 80JJAA, we have analyzed the relevant provisions of section 10B and 80JJAA reproduced below and find that both the sections are worded similarly with regard to an undertaking / business being formed by splitting up or reconstruction “Section – 10B “(2) This section applies to any undertaking which fulfils all the following conditions, namely:— (i) it manufactures or produces any article or thing; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence: …………………. Section 80JJAA (2) No deduction under sub-section (1) shall be allowed,— (a) if the business is formed by splitting up, or the reconstruction, of an existing business ………………….
The argument of the Ld DR that the decision rendered in the context of 10B cannot be applied for 80JJAA is not tenable. We respectfully follow the binding decision of the coordinate bench of the Tribunal in assessee’s own case (supra) to confirm that the assessee is not formed by splitting up or reconstruction and eligible for deduction u/s.80JJAA.
The next issue is regarding exclusion of 100 employees for the purpose of computing eligible deduction u/s 80JJAA. The Ld.AR relied on the decision of the Delhi Tribunal in the case of Panacea Biotech Ltd., Vs. ACIT (2008) 25 SOT 1 Delhi, where it was held that the 100 employees need not be excluded for the purpose of computing the deduction u/s 80JJAA where the employees are more than 100.
The Ld DR once again submitted that he agrees with the view taken by the lower authorities. The coordinate bench of Bangalore Tribunal in the case of M/s. Honeywell Technology Solutions Lab Pvt. Ltd vs DCIT (ITA No.1210/Bang/2018) has considered the similar issue and held that “10. We may like to clarify that in a case if the assessee fulfils both the conditions that workmen employed during the year were 100 and percentage increase of regular workmen as compared to last day of preceding year is not less than 10 per cent, the assessee will be eligible for the benefit in excess of 100 workmen employed. In other words the law does not require that in the year the number of regular workmen appointed should be more than 100 and only excess of 100 regular workmen so employed will be eligible for benefit of section 80JJAA of the Act. The ld. CIT(A) as well as Assessing
Officer have gone wrong in excluding 100 regular workmen out of 236 workmen employed during previous year relevant to assessment year 2003-04. The Assessing Officer will bear in mind this position of law while computing additional wages for the purposes of deduction under section 80JJAA of the Act”
We respectfully follow the decision of the coordinate bench of the Bangalore Tribunal and hold that the 100 employees need not be excluded for the purpose of computing the deduction u/s.80JJAA where the employees are more than 100.
The issue raised with regard to the assessee including the workmen recruited in the immediate previous year while computing eligibility criteria of 300 days, The Ld.AR submitted that this issue is squarely covered by the decision of Karnataka High Court in the case of CIT Vs. Texas Instruments India Pvt. Ltd. (2021) 127 taxmann.com 59 and that the assessee is right in computing the eligibility criteria.
The Ld DR did not have any counter arguments in this regard. We are bound by the decision of jurisdictional High Court in the case of Texas Instruments (Supra) where it is held that “16.7 Sri. Aravind, learned Senior Panel counsel of the Revenue, has strenuously argued that the period of 300 days in a year would mean 300 days in the financial year alone, not in the calendar year or otherwise. He has submitted that if the period of 300 days is not satisfied, no such deduction could be allowed. 16.8 Admittedly, the provisions concerned, i.e. Section 80JJ-AA, comes under Chapter-VI-A of the IT Act, which deals with deductions in certain income; this deduction is issued and or permitted as an incentive to the Assessee on fulfilling certain criteria as required under the various provisions under Chapter-VI-A. The incentive of the deduction provided under section 80JJ-AA is with an intention to encourage the Assessee to employ more and more people, provide employment and, in lieu thereof, permit the employer/assessee to deduct certain amounts from the income when the returns are filed. It is with this object, purport and intent of section 80JJ-AA of the Act that the present facts and circumstances would have to be considered. It is also required for the Assessing Officer, CITA, Income-tax Appellate Tribunal, as also any other officer to always interpret and or apply the provisions of the Act, taking into consideration the intent and purport of the said provision.
16.9 The meaning or interpretation now sought to be given by Sri. Aravind, learned Senior Panel counsel is that only if the employee were employed for a period of 300 days in a particular financial year, only then deductions could be claimed, if not the deductions could not be claimed even though such employee has been employed for 300 continuous days or more.
16.10 We would disagree with the said contention. What is required is for a person to be employed for a period of 300 days continuously. There is no such criteria made out for a person to be employed in any particular year or otherwise. If such a restrictive interpretation is given, then any person employed post 5th June of a particular year would not entitle the Assessee to claim any deduction. Thus in order to claim the benefit under section 80JJ-AA, an employer would have to hire the workmen before 5th June of that year. As a corollary, since the Assessee would not get any benefit if the workmen were engaged post 5th June, the employer/Assessee may not even employ anyone post 5th June, which would militate against the purpose and intent of section 80JJ-AA, which is the encourage creation of new employment opportunities. 16.11 The Income-tax Appellate Tribunal, while considering a similar situation as in Bosch Ltd. (supra) held that so long as the workman employed for 300 days, even if the said period is split into two blocks, i.e. the assessment year or financial year, the Assessee would be entitled to the benefit of Section 80JJ-AA in the next assessment year and so on so forthwith for a period of three years. The Income-tax Appellate Tribunal, having held to that effect, in our considered opinion, it would not be open for the Revenue to now contend otherwise, more so since the said order has attained finality on account of the Revenue not having filed an appeal.
16.12 It is sought to be contended by Sri. K. V. Aravind, learned Senior Panel counsel that the fact that such an interpretation could not be given is established by the curative amendment carried out in the year 2018 wherein it is clarified that an assesses whose employee completes 300 days in a second would also be entitled to a deduction for three years therefrom. Thus he submits that the amendment having been brought into force in the year 2018 the present matter relating to d 7-2008, the said curative or clarificatory amendment would not come to the rescue of the assessee and as such, the finding of the Tribunal in this regard is required to be set aside.
6.13 We are unable to agree with such a submission- the amendment of the year 2018 though aimed curative by Sri. Aravind, we are of the considered opinion that the same is more an explanatory amendment or a clarificatory amendment which clarifies the methodology of applying section 80JJ-AA of the Act. If the submission of Sri. K.V. Aravind is accepted, then no employer/assessee would be able to fulfil the requirement of employing its labour/assessee prior to 5th June of that assessment year so as to claim the benefit of Section 80JJ-AA. Such a narrow and pedantic approach is impermissible. It also being on account of the fact that section 80JJ-AA relating to deductions under Chapter is an incentive and, therefore, has to be read liberally. In this aspect, we are also supported by the decision of the Apex Court in Mavilayi Service Co-operative Bank Ltd. 's case (supra), wherein the Apex Court has held that a benevolent provision has to be read liberally and reasonably and if there is an ambiguity in favour of the Assessee.
16.14 The Apex Court in the case Vatika Township (P.) Ltd. (supra) has also held similarly, in that if there is a benefit conferred by legislation, the said benefit being legislative’s object, there would be a presumption that such a legislation would operate with retrospective effect by giving a purposive construction. Thus the clarificatory amendment of the year 2018 can also be said to apply retrospectively for the benefit of the Assessee even though the Revenue contends that there was no provision in the year 2007 permitting the Assessee to avail the benefit of deduction when the employee works for a period of 300 days in consecutive years.
16.15 In view thereof, the substantial question No. I is answered by holding that the software professional/engineer is a workman within the meaning of section 2(s) of ID Act, so long as such a software professional does not discharge supervisory functions, the benefit of section 80JJ-AA can be claimed by an employer/assessee even if the employee were not to complete 300 days in a particular assessment year but in the subsequent year so long as there is continuity of employment, the Assessee could continue to claim further benefit in the next two years as provided in under section 80JJ-AA of the Act.”
Considering the binding provisions of the jurisdictional High Court’s decision, we allow the appeal of the assessee and hold that the assessee is entitled for a claim u/s 80JJAA.
The next ground for our consideration is the addition made to the book profit of the assessee u/s 115JB of the Act.
The AO during the course of asst. proceedings has added back the provisions created towards gratuity, leave encashment and bonus while computing the book profits of the assessee holding that the same to be an unascertained and contingent liabilities. The order of the AO was upheld by the CIT who relied on sec. 43B of the Act.
Before us, the Ld.AR submitted that the gratuity and leave encashment provision is made based on the actuarial valuation which is undisputed fact. The Ld.AR submitted that there are judicial pronouncements where it has been held that the provisions credited based on actuarial valuation would be an ascertained liability and cannot be added back for determination of book profits u/s 115JB of the Act. With respect to provision for payment of bonus, the Ld.AR submitted that the provisions is made as per the Payment of Bonus Act 1965 and it is statutory liability and therefore, it is an ascertained liability. For this the Ld.AR placed reliance on the judgment of Hon’ble Bombay High Court in the case of CIT Vs. Echjay Forgings Pvt. Ltd., (2001) 116 Taxman 322 (Bom). The Ld.AR further submitted that sec. 115JB of the Act being a separate code in itself, the AO does not have the jurisdiction to go beyond the net profit shown in the profit and loss account except to the extent provided in the explanation to sec. 115JB and for this contention the Ld.AR placed reliance on the decision of the Hon’ble Supreme Court in the case of Apollo Tyres Ltd., Vs. CIT (2002) 122 Taxman 562 (SC).
The Ld.DR placed reliance on the order of the lower authorities. We heard both the parties and perused the materials on record. Section 115JB of the Act pertains to special provision for payment of tax by certain companies. Sub-section (1) of Section 115JB of the Act provides that a minimum alternative tax to be paid by the companies as computed under the said provision. Sub-section (2) of Section 115 JB requires every company for the purposes of the said section to prepare its profit and loss account in accordance with the provisions of paras 2 and 3 of Schedule 6 of the Companies Act. Explanation 1 to said section provides that for the purposes of the said 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 various items specified in Clauses (a) to (i) provided therein. Clause (c) thereof reads as thus: “(c) The amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities;” Therefore as per the provisions, if an amount is specified for provision which is for meeting with the liabilities not ascertained such provision so made shall have to be added back to the book profit of the company. In other words if such provision is made for ascertained liability, no such addition back shall be made. In assessee’s case the provision for gratuity and leave encashment is done based on the actuarial valuation which fact is available on record from the Actuarial Report submitted (page 188 – 255 of the paper book). The law is fairly settled in this regard and the courts have taken a consistent view that when the provision for gratuity / leave encashment is done based on actuarial valuation the same cannot be held as an unascertained liability and cannot be added for the purpose of computing the book profits u/s.115JB. The Hon’ble Jurisdictional High Curt in the case of CIT VS. Kirloskar Systems Ltd, (2013) 40 Taxmann.com 124 (Kar) held that “The Apex Court in the case of Bharat Earth Movers Vs. CIT [2000] 245 ITR 428 has held that an assessee who is maintaining the account on mercantile System, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of business, regard being had to the accepted principle of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid. The liability would be an accrued liability and would not convert into a conditional one merely because the liability was to be discharged at a future date. Therefore for that reason it was held that the gratuity payable and encashment of EL is not a contingent liability and the provisions thereof is to be deducted. In the light of the settled principles laid down by the Apex Court no substantial question of law arise for the year under consideration in this appeal. Accordingly, the appeal is dismissed”
With regard to provision made for bonus which the AO has treated as unascertained liability, the Hon’ble Bombay High Court in the case of Echjay Forgings Pvt. Ltd., (Supra) has held that “the assessee has shown that it was liable to pay bonus under the Payment of Bonus Act. Accordingly, it provided for payment of bonus to the employee. Therefore, it cannot be said that the provision for bonus amounting to Rs.3,46,360/- is not an ascertained liability till it is actually paid to the employees.”
Based on the various judicial pronouncements and the binding decision of jurisdictional High Court discussed above, we are of the considered view that the AO is not right in adding back the provisions made by the assessee towards gratuity, leave encashment and bonus for computation of book profits u/s. 115JB on the ground that they are unascertained liability. Hence, we allow the appeal in favour of the assessee and direct the AO to give effect to the same in the computation of book profits u/s 115JB of the Act.
In the result, the appeal of the assessee is allowed.