The Chennai bench of the Income Tax Appellate Tribunal (ITAT) has held that prior period expense can’t be added back while computing profit & gain of business and profession.
Kavithalayaa Productions-(P) Ltd, the assessee company engaged in the business of film production and distribution filed its return of income for the AY 2008-09 on 14.09.2008 declaring a total income of Rs. ‘NIL’ under normal provisions of the Act, and also book profit computed u/s.115JB of the Act.
The assessment has been completed u/s.143(3) of the Income Tax Act, on 22.12.2010 and assessed a total income of Rs.64,67,010/-. On revision proceedings, the assessment order passed by the AO has been set aside on two issues and directed the AO to re-frame the assessment on the issue of income admitted in the statement of total income to claim TDS Credits amounting to Rs.65,61,610/- and disallowance of prior period expenses while computing book profit amounting to Rs.29,85,478/-.
During the second round of assessment proceedings, the AO completed the assessment and determined total income under book profit at Rs.55,06,502/- by making additions towards income admitted to claiming TDS Credits and disallowance of prior period expenses. The CIT(A) sustained the additions made by the AO.
It was contended that since, the adjustment made by the AO towards income offered for claiming TDS Credits and ‘prior period expenses’, does not come under any adjustment as provided under Explanation (1), the question of re-computing book profit does not arise.
A Coram comprising of Shri Mahavir Singh, Vice President and Shri G Manjunatha, Accountant Member observed that if advances received by the assessee from customers on which TDS Credits have been claimed have been offered as income of subsequent financial years, then the same needs to be recognized as income as and when such income accrues to the assessee.
It was viewed that when the assessee has treated advances from customers as a liability in the books of accounts pending recognition of income in subsequent financial years, it cannot be said that the assessee has not followed the provisions of the Companies Act, 1956, more particularly, Part-II & III of Schedule-VI of Companies Act, 1956 while preparing its accounts.
The Tribunal directed the AO to delete additions made towards income admitted to claiming TDS Credits while computing book profit u/s.115JB of the Act.
Further, the bench viewed that the assessee has not prepared its accounts following Part-II & III of Schedule-VI of the Companies Act, 1956, and held that the AO is very well empowered to re-compute book profit for Sec.115JB of the Act.
The ITAT bench rejected the ground taken by the assessee and sustain the additions made by the AO towards ‘prior period expenses’ items to be excluded while computing book profit u/s.115JB of the Act. The appeal filed by the assessee was partly allowed.
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