JUDGMENT
S. H. Kapadia. J.
1. Being aggrieved by the decision of the Tribunal dated 4th August, 1999, the Department has filed this appeal under Section 260A of the Income Tax Act.
2. The short question which arises for consideration before this Court in the above appeal is as follows :
“Whether on the fads and in the circumstances of the case the Tribunal erred in law in holding that the provisions made for doubtful debts, bonus, gratuity, wealth tax liability and Foreign Exchange rate difference could not be added to the net profit shown in the profit and loss account within the meaning of Explanation to section 115J(1A) while working out the book profit under Section 115J of the 1A Act, 1961?”
FACTS :
3. The assessee Company filed its return on 31.12.1990 for the assessment year 1990-91 declaring total loss of Rs. 32.34 lacs. The business of the assessee is to manufacture steel forgings. The AO disallowed the deductions claimed by the assessee on account of payment of wealth tax. He also disallowed the provisions made by the assesses for doubtful debts; for gratuity; for bonus and in respect of foreign exchange rate difference while computing the book profits under section 115J of the Income Tax Act. They were disallowed only on the ground that while computing the book profits under section 115J(1A), the above items were required to be added hack to the net profit as shown in the profit and loss account as per the explanation to section 115J(1A). Being aggrieved, the assessee carried the matter in appeal to CIT (Appeals). The First Appellate Authority agreed with the view of the AO. The First Appellate Authority came to the conclusion that the net profit in the profit and loss account stood increased by the amount of wealth tax paid as also by the amounts set aside to meet liabilities, other than ascertained liabilities. The CIT (Appeals) added all the above items to the net profit. Being aggrieved the assessee preferred an appeal to the Appellate Tribunal. In view of the earlier decision of the Tribunal, it was held that book profits were required to be computed in accordance with the provisions of the Companies Act and, therefore, the disallowance made by the Department under section 115J were impermissible. The Tribunal accordingly allowed the appeal. Hence, the Department has come by way of appeal under section 260A of the Income Tax Act.
FINDINGS :-
4. The short point which arises for consideration in this appeal is, whether the AO was right in disallowing the claims for deduction in respect of the five items and ordering addition thereof to the net profit for the purposes of section 115J of the Act.
5. The addition of the five items to the net profit is accordingly discussed herein below :
(I) ADDITION OF WEALTH TAX PAID BY THE ASSESSEE TO THE
NET PROFIT :
6. Mr. Desai, learned Senior Counsel for the Department, fairly concedes that the net profit, an shown in the profit and loss account, will not be increased by the amount of wealth tax paid because under clause (a) of the Explanation to section 115J(1A), what is contemplated is
the amount of income tax paid. Under the said clause, payment of wealth tax is not contemplated. Therefore, the net profit shall not be increased by the amount of wealth tax paid by the assessee.
(II) WHETHER THE NET PROFIT WAS REQUIRED TO BE INCREASED BY RS. 1,67,411/- BEING THE PROVISIONS FOR DOUBTFUL DEBTS :
7. Under clause (c) of the Explanation to section 115J of the Act, unless a provision is made for ascertained liabilities, the provision made has to be included in book profit for the purpose of taxation under section 115J of the Act. The assessee, in the present case, has claimed exclusion for the sum of Rs. 1,67,4 11/- from the profit and loss account on the ground that the same has been made as a provision for doubtful debts in respect of an ascertained liability. In this case, on facts, we find that the Department has not disputed the contention of the assessee that the said liability is an ascertained liability. The assessee specifically contended before the Department that the provision has been made to meet ascertained liability. This was never disputed. No finding has been given on this point by the AO. No finding has been given by the First Appellate Authority as to how the above clause (c) of the Explanation stood attracted. On the other hand, theTribunal has followed itsJudgmentin the case of M/s.Echjay Forgings Pvt. Ltd., Mumbai u. DCIT, Spl. Range-30, Mumbai,. Hence, on facts, there is no material before the Court in support of the conclusion drawn by the AO that the provision made by the assessee was in respect of an unascertained liability. Therefore, we have decided this point only on the facts of this case. In the case of Dy. CIT v. Beard sell Ltd., the claim of the assessee was disallowed on the ground that the provision was not for ascertained liabilities and, accordingly, an amount of Rs. 33.49 lacs came to be added to the net profit. In that matter the adjustment, was made under section 143(1)(a) of the Act. Hence, the said Judgment has no application to the facts of the present case. In the present case, the Department has invoked section 143(3) of the Act. Therefore, the Department was required to record a proper finding of fact before adding Rs. 1,67,411/-.
(IIl) WHETHER THE NET PROFIT WAS REQUIRED TO BE IN CREASED
BY AN AMOUNT OF RS. 5,OO,OOO/- BEING THE PROVISION FOR
GRATUITY:
8. As stated above, no reasons have been given by the AO for adding the said amount to the net profit. The assessee has made the provision for gratuity on the basis of actual calculations. Hence, it cannot be said that the provision for gratuity is not an ascertained liability.
(IV) WHETHER THE NET PROFIT WAS REQUIRED TO BE INCREASED BY AN AMOUNT OF RS. 3,46,370/- BEING THE PROVISION FOR BONUS:
9. The assessee has shown that it was liable to pay bonus under Payment of Bonus Act. Accordingly, it provided for payment of bonus to the employees. Therefore. It cannot be said that the provision for bonus amounting to Rs. 3,46,370/- is not an ascertained liability till it is actually paid to the employees.
(V) DISALLOWANCE OF RS. 1,38,234 -AS REVENUE EXPENDITURE ON ACCOUNT OF FLUCTUATIONS IN FOREIGN EXCHANGE RATES:
10. The assessee debited the aforesaid amount on account of the foreign exchange rate fluctuations. They claimed deduction of the aforestated amount as revenue expenditure. According to the AO the said expenditure was incurred for purchase of plant and machinery and, therefore, the amount was required to be added back to the cost of the asset subject to depreciation. He accordingly directed Rs 1,38,234/- to be added back to the total income of the assessee. This order was confirmed in appeal by the Commissioner of Income Tax (Appeals). However, on facts, the Tribunal found that the assessee had taken a foreign exchange loan from ICICI and though, normally, under the provisions of Income Tax Act such increase in the liability due to fluctuations in the foreign exchange rates is normally taken as on capital account, the same is debited to the profit and loss account under the Companies Act. We agree with the view expressed by the Tribunal. While applying section 115J, the AO has to go by computation of the book profit as permitted under the Companies Act. By virtue of section 115J, in the case of a Company whose total income as computed under the Income Tax Act is less than 30% of the book profit, the total income chargeable to tax will be 30% of the book profit as computed. That, for the purposes of section 115J book profit will be the net profit as shown in the profit and loss account prepared in accordance with Schedule-VI to the Companies Act subject to certain adjustments. The net profit, as calculated above, will be increased, infer alia, by the amounts debited to the profit and loss account. In the present case, the Tribunal has found, on facts, correctly, that the said amount of Rs. 1,38,234/- has been debited to the profit and loss account under the Companies Act. Hence, the Department erred in adding the said amount to the net profit.
11. Accordingly, the above question is answered in the negative i.e. in favour of the assessee and against the Department.
12. Appeal is disposed of accordingly. No order as to costs.
