DCIT (OSD) 8(2), MUMBAI vs. HOTEL LEELAVENTURES LTD, MUMBAI

On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding the claim of the assessee that the amortised amount of exchange differences arising out of foreign currency borrowings are not contingent liability and should not form part of computation of “Book Profit” for the purposes of S.115JB of the I.T.Act, 1961 without appreciating that loss on account of foreign exchange fluctuation is contingent in nature and hence cannot be taken into account while computing book profits as per Companies Act.”

By passing order u/s.154 the AO enhanced book profit computed u/s. 115JB by making addition on account of amortised amount of exchange differences arising out of foreign currency borrowings. By the impugned order, the CIT(A) deleted the same after observing as under :- 1.3.1 I have carefully considered the submissions and contention of the Ld. AR of the appellant and also carefully gone through the facts and explanation given by the Ld. AR of the appellant as well as the Ld. AO. The Ld. AO has made the addition to the book profit determined under section 115JB of the Act, In order to appreciate the nature of the addition made it is worthwhile to extract the provisions of section 115JB of the Act which reads as under:- 115JB. (1) Notwithstanding anything contained in any other precision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2001, is less than seven and one-half per cent of its book profit, [such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of seven and one-half per cent. (2) Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956): Provided that while preparing the annual accounts including profit and loss account, - (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including profit and loss accounts, (iii) the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of1956): Provided further that where the company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under this Act, - (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including profit and loss account; (iii) the method and rates adopted for calculating the depreciation, shall correspond to the accounting policies, accounting standards and the accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including profit and loss account for such financial year or part of such financial year falling within the relevant previous year. Explanation. - For the purposes of this section, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by- (a) the amount of income-tax paid or payable, and the provision therefore; or (b) the amounts carried to any reserves, by whatever name called §l[, other than a reserve specified under section 33Acl; or (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (d) the amount by way of provision for losses of subsidiary companies; or (e) the amount or amounts of dividends paid or proposed; or (f) the amount or amounts of expenditure relatable to any income to which section 10 [(other than the provisions contained in clause (23G) thereof] or, section 10A or section 10B or section 11 or section 12 apply, if any amount referred to in clauses (a) to (j) is debited to the profit and loss account, and as reduced by- [(i) the amount withdrawn from any reserve or provision (excluding a reserve created before the 1st day of April, 1997 otherwise than by way of a debit to the profit and loss account), if tiny such amount is credited to the profit and loss account: Provided that where this section is applicable to an assessee in any previous year, the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the section 115JA, as the case may be; or] (ii) the amount of income to which any of the provisions of section 10 [(other than the provisions contained in clause (23G) thereof)] or section 10A or section 10B or section 11 or section 12 apply, if any such amount is credited to the profit and loss account· or [(iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account. Explanation. - For the purposes of this clause, - (a) the loss shall not include depreciation; (b) the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation is nil; or] (iv) the amount of profits eligible for deduction under section 80HHC, computed under clause (a) or clause (b) or clause (c) of sub-section (3) or sub-section (3A), as the case may be, of that section, and subject to the conditions specified in that section; or (v) the amount of profits eligible for deduction under section 80HHE computed under sub-section (3) or sub-section (3A), as the case may be, of that section, and subject to the conditions specified in that section; or (vi) the amount of profits eligible for deduction under section 80HHF computed under sub-section (3) of that section, and subject to the conditions specified in that section; or (vii) the amount of profits of sick industrial company for the assessment year commencing on and from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses. Explanation. - For the purposes of this clause, "net worth" shall have meaning assigned to it in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1ofI986). (3) Nothing contained in sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of sub-section (2) of section 32 or sub-section (3) of section 32A or clause (ii) of sub-section (1) of section 72 or section 73 or section 74 or sub-section (3) of section 74A. (4) Even company law which this section applies, shall furnish a report in the prescribed form from an accountant as defined in the Explanation below sub-section (2) of section 288, certifying that the book profit has been computed in accordance with the provisions of this section along with the return of income filed under sub-section (1) of section 139 or along with the return of income furnished in response to a notice under clause (i) of sub-section (1) of section 142. (5) Save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section.] [(6) The provisions of this section shall not apply to the income accrued or arising on or after the 1st day of April, 2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic Zone, as the case may be.] 1.3.2 The Hon'ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT (2002) 273 (SC), held that the assessing officer, while computing the book profits of a company under section 115J of the Income Tax Act, 1961, 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 section 115J. The assessing officer does not have the juri iction to go behind the net profits shown, in the profit and loss account except to the extent provided in the Explanation. The use of words in accordance with the provisions of Part II and III of Schedule VI to the Companies Act in section 115J was made for the limited purpose of empowering the assessing officer to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the assessing officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinised and certified by statutory auditors and approved by the company in general meeting" and thereafter to be filed before the