INTERNATIONAL BAKERY PRODUCTS LIMITED,CHENNAI vs. ACIT CORPORATE CIRCLE 2(3), CHENNAI

This appeal filed by the assessee is directed against order of learned Commissioner of Income Tax (Appeals) – 13, Chennai, dated 22.02.2018 and pertains to assessment year 2006-07.

The assessee has raised the following grounds of appeal:-

The ld.AR for the assessee submitted that the ld.CIT(A) has erred in sustaining computation of book profit u/s.115JB by the AO, without considering provision made for gratuity in books of accounts and computed net loss for the year. The AO has taken net profit before allowing deduction towards provision for gratuity without appreciating the fact that provision made for gratuity relating to earlier years is deductable on the actuarial valuation basis.

The ld.DR on the other hand strongly supporting order of the ld.CIT(A) submitted that the assessee has debited provision for gratuity relating to earlier years below the line in the profit & loss account, which means the same item needs to be considered in light of Explanation -1 to section 115JB of the Act. If you consider Explanation – 1 to section 115JB of the Act, then deduction claimed by the assessee is neither covered under positive or negative adjustments. Hence, there is no error in the reason given by the AO to take net profit as per profit & loss account before allowing deduction towards gratuity liability.

We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The provisions to section 115JB of the Act, deals with computation of book profit. Explanation (1) to section 115JB of the Act provides for positive and negative adjustments. It is a well settled principle of law by various decisions of courts including the decision of Hon’ble Supreme Court in the case of M/s. Apollo Tyres Ltd vs. CIT, supra, that except as provided under Explanation (1), the AO cannot make any adjustment to book profit computed u/s.115JB of the Act. In this case, the assessee has taken book loss of Rs.20,19,930/- whereas, the AO has considered book profit of Rs.40,78,793/-. The reason for difference in net profit / loss taken by the assessee and AO is, on account of provision for gratuity relating to earlier years as prior period item. As per provisions of Act and accounting principles, prior period item whether expenses or income is an item of expense deductible or item of income, always comes below the line in the profit & loss account. That means, for all practical purposes, the net profit as per books of account for the relevant period is net profit computed without making any adjustment by deducting prior period items or other appropriations made in the current financial year. If you go by this analogy then, provision for gratuity relating to earlier years claimed by the assessee under the head ‘prior period items’ comes below the line in profit & loss account. If you consider provision for gratuity relating to earlier years as item comes below the line of profit & loss account, then for the purpose of computation of book profit, net profit as per books of accounts should be considered before allowing deduction for provision for gratuity relating to earlier years. In this case, profit for the year before allowing deduction for provision for gratuity was at Rs.40,78,793/- and if you consider said figure, then adjustment made by the assessee to book profit computed u/s.115JB of the Act towards provision for gratuity relating to earlier years is not covered under Explanation (1) to Section 115JB of the Act. Further, it is a well settled principle of law that the AO does not have power to Explanation (1) to Section 115JB of the Act. This is amply clear from the decision of Hon’ble Supreme Court in the case of M/s. Apollo Tyres Ltd., vs. CIT, supra. Therefore, we are of the considered view that there is no error in reasons given by the AO to compute book profit u/s.115JB of the Act by taking net profit as per profit & loss account before considering deduction claimed for prior period item being provision for gratuity relating to earlier years.

As regards case law relied upon by the assessee in the case of ACIT vs. Harrisons Malyalam Ltd., (2015) 42 ITR (Trib) 0090, we find that although the ITAT, Cochin Bench has considered the issue for provision for gratuity while computing book profit and held that provision for gratuity cannot be added for computing book profit u/s.115JB of the Act, but fact remains that there is a difference between provision for gratuity of current year and provision for gratuity relating to earlier years. If provision for gratuity relating to current financial year is provided on actuarial basis, then same is deductible expenses and thus, the question of making adjustment to book profit does not arise. If provision for gratuity relating to earlier years is provided in the books of accounts as item of prior period expenses, then same needs to be provided in the profit &

In this view of matter and considering facts and circumstances of this case, we are of the considered view that there is no error in computation of book profit u/s.115JB of the Act by excluding prior period item. Hence, we are inclined to uphold the findings of the CIT(A) and we reject the ground taken by the assessee.

In the result, the appeal filed by the assessee is dismissed.