Prior Period Items can be excluded while computing Book Profit: ITAT [Read Order]

computing Book Profit -ITAT - Taxscan

The Income Tax Appellate Tribunal (ITAT), Chennai, held that there is no error in computation of book profit under section 115JB of the Income Tax Act, 1961 by excluding prior period item.

 The quorum consisting of Duvvuru RL Reddy (Judicial Member), and G.Manjunatha (Accountant Member) held that, 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 the Assessing Officer cannot makeany adjustment to book profit computed u/s.115JB of the Act.

Inthis case, the assessee has taken book loss of Rs.20,19,930/-whereas, the Assessing Officer  has considered book profit of Rs.40,78,793/-. Thereason for difference in net profit / loss taken by the assessee andthe Assessing Officer is, on account of provision for gratuity relating to earlieryears as prior period item. As per provisions of Act and accountingprinciples, prior period item whether expenses or income is an itemof expense deductible or item of income, always comes below theline in the profit & loss account. That means, for all practicalPurposes, the net profit as per books of account for the relevantperiod is net profit computed without making any adjustment bydeducting prior period items or other appropriations made in thecurrent financial year.Provision forgratuity relating to earlier years claimed by the assessee under thehead ‘prior period items’ comes below the line in profit & lossaccount. If you consider provision for gratuity relating to earlieryears as item comes below the line of profit & loss account, then forthe purpose of computation of book profit, net profit as per books ofaccounts should be considered before allowing deduction forprovision for gratuity relating to earlier years.

T. Banusekar counsel for the appellant argued that that in the order of the Commissioner of Income Tax (Appeals) , they failed to appreciate that the Assessing officer has accepted book loss of Rs 20,19,390/- for computation of tax as per normal provisions of income tax however, while computing book profit for the purpose of Section 115JB of the Income Tax Act,1961, the Assessing Officer has determined the book profit as Rs 40,78,793/- is contrary to law, facts and circumstances of the case to the extent prejudicial to the interests of the appellant and is opposed to the principles of equity, natural justice and fair play.

R. Anitha counsel for the revenue relied upon the decision of Hon’ble Supreme Court on  ApolloTyres Ltd. v. CIT (255 ITR 273), in which the court held that that provision for gratuity relating to earlier years is not in accordance with provisions of section 115JB of the Act. He further noted that explanation to section 115JB of the Act, does not provide for adjustment made by the assessee.In this case, profitfor the year before allowing deduction for provision for gratuity wasat Rs.40,78,793/- and if you consider said figure, then adjustmentmade by the assessee to book profit computed u/s.115JB of the Acttowards provision for gratuity relating to earlier years is not covered.

The Tribunal while dismissing the appeal held that there is no error in reasons given by the AO tocompute 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

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