| SooperKanoon Citation | sooperkanoon.com/75217 |
| Court | Income Tax Appellate Tribunal ITAT Delhi |
| Decided On | Sep-22-2006 |
| Judge | S Tiwari, P Malhotra |
| Reported in | (2008)298ITR296(Delhi) |
| Appellant | Asstt. Commissioner of Income Tax |
| Respondent | E.i. Dupont India Ltd. |
2. First ground in this appeal is directed against deletion of the addition of Rs. 3,19,93,825/- being expenses incurred on repairs and maintenance of lease-hold premises. Facts of the of the case leading to this dispute briefly are that the assessee filed return declaring loss of Rs. 5,21,75,080/-. While computing this loss the assessee claimed deduction of a sum of Rs. 3,19,93,825/- under the head 'Repairs and maintenance on lease-hold premises'. The assessee claimed deduction of this amount relying upon the judgment of Hon'ble Supreme Court in the case of Madras Auto Services Pvt. Ltd. 233 ITR 468 (SC). The learned Assessing Officer found that in the accounts of the assessee the expenditure had been capitalized and depreciation of Rs. 51,34,664/-was reduced therefrom in "Schedule V- Fixed Assets" appended to Balance - Sheet as at 31.3.1999. However, in the income-tax return the assessee treated the entire expenditure as revenue expenditure and claimed 100% deduction. The learned Assessing Officer held that the assessee was not entitled to adopt two different strategies under Companies Act and Income-tax Act. The decision relied upon by the assessee was not applicable on the facts of the case of the assessee because in the books of accounts the assessee had himself capitalized the expenditure.
The learned Assessing Officer, therefore, rejected the assessee claim of deduction amounting to Rs. 3,19,93,825/- and instead he allowed the assessee a depreciation of Rs. 36,98,709/- as worked out by him at page 2 of the assessment order.
3. During the course of appeal before the learned CIT(Appeals) the assessee submitted that the expenditure had been incurred on lease-hold premises and the initial period of lease was three years giving the assessee no enduring benefit for the expenses incurred. The treatment given in the books of accounts of the assessee was as per Schedule VI of the Companies Act as "Lease-hold improvements" and the same was spread over a period of three years. That did not in any way debar the assessee from claiming the entire expenditure under Income-tax Act as revenue expenditure. The very fact that the expenditure had been incurred on lease-hold premises clearly established that the expenditure had been carried out for better enjoyment of lease-hold property and the benefit derived was co-terminus with the lease making it obvious that there could not be any enduring benefit. The assessee placed reliance before the learned CIT(Appeals) on some case law and pleaded that treatment given in the books of account was not binding as far as the Income-tax Act proceedings were concerned. The assessee relied upon the judgment of Hon'ble Delhi High Court in the case of CIT v. Shriram Refrigeration Industries Ltd. 253 ITR 783 (Del) to support his contention that any expenditure towards extension, renovation or improvement of building on a lease-hold land was of revenue nature only. The assessee referred to the judgment of Hon'ble Supreme Court in the case of L.H. Sugar Factory & Oil Milk 125 ITR 293 (SC) and argued that if the expenditure was merely to facilitate bussiness operations to be carried out more efficiently or more profitably, it would be on revenue account even though the addition may endure for an indefinite future. The assessee submitted that for assessment years 1996-97 and 1997-98 similar expenditure had been allowed by the CIT(Appeals) as revenue expenditure.
4. The learned CIT(Appeals) held that the expenditure included LAN equipment for DLF office at Rs. 1,06,72,526/- which comprised of switches, hubs, routers and modems for the connectivity of the Dupont network in India and abroad. Similarly expenditure of Rs. 4,00,553/- was on account of Access Control System for DLF office which comprised of sweep cards and proximity cards given to the employees to enter the office premises. The expenditure of Rs. 29,56,590/- pertained to electronic work at DLF office for connecting each employee's working place. The expenditure of Rs. 18,58,189/- at DLF office was nothing but heating, ventilation and air-conditioning expenses (HVAC) incurred at office premises. Similarly, a sum of Rs. 7,11,446/- was for the HVAC works of Bombay office. The expenditure of Rs. 23,14,591/- related to connectivity of employees at Bombay office. The expenditure of Rs. 5,17,000/- was carried out for concealed wiring and roofing at Bombay office. The expenditure of Rs. 9,29,673/- was for LAN equipments at Bombay office and Rs. 3,26,130/- for Access Control System of Bombay office. Besides, interior work carried out at Bombay amounted to Rs. 54,81,444/- and at DLF office it amounted to Rs. 1,26,57,696/-. That expenditure was on fittings and fixtures and partitions so as to separate each person's work place in an office environment. A sum of Rs. 21,67,987/- was spent on the work in that relation carried OUT by M/s Blow Plast. The learned CIT(Appeals) held that the entire expenditure had been incurred to facilitate the assessee to utilize the lease-hold premises more profitably and efficiently for enhancing the profitability and productivity of the assessee and as such it was a revenue expenditure, as held by Hon'ble Supreme Court in the case of L.H. Sugar Factory & Oil Mills (supra). It was immaterial that the assessee treated the same in its books of account differently, in view of Schedule VI of the Companies Act. For that purpose the learned CIT(Appeals) referred to the judgments reported in 82 ITR 363 (SC) and 157 ITR 751 (Bom.). On this basis the learned CIT(Appeals) directed that the entire expenditure should be treated as revenue expenditure and allowed to the assessee as a deduction Under Section 37(1) of the Act. He directed the learned Assessing Officer to withdraw depreciation as allowed. Still aggrieved, revenue is in appeal before us.
5. During the course of hearing before us the learned DR argued that the assessee had incurred huge expenditure on the premises after being satisfied that the premises, though lease hold, were likely to remain with the assessee for sufficiently long period. It was the prevalent practice for commercial premises to be leased out for a period of three years each time but the lease being renewed from time to time. Hence the argument of the assessee that the advantage was for a period of three years only was not of much consequence. There was no merit in the second contention of the learned CIT(A) that the expenditure had been incurred to carry out more efficiently and more profitably the business operations of the assessee All expenditure whether revenue or capital was incurred ot facilitae the business operations to be carried out more efficiently or more profitably. This aspect was not what distinguished a revenue expenditure from capital expenditure it had to be present in both revenue as well as capital expenditure. The learned CIT(Appeals), therefore, misdirected himself in that respect. The expenditure was of large amounts and brought into existence a new asset that was part of fixed assets. That was the reason the assessee had himself designated the assets thus created as "Fixed assets" and shown it in Schedule V to the balance-sheet.
6. The learned Counsel for the assessee argued that the department had not gone in appeal for assessment years 1996-97 and 1997-98. There was no dispute that the expenditure had been incurred in relation to the premises that were lease-hold. Any expenditure incurred in respect of lease-hold premises had to be in nature of things revenue expenditure only. The learned AR of the assessee submitted that there was no basis to hold that these premises were likely to be with the assessee for an indefinite period. He referred to lease agreement dated 9.1.1998 with M/s DLF Commercial Developers and the agreement dated 21.11.1997 with M/s High Rise Properties Pvt. Ltd. and stated that both the Delhi premises as well as Bombay premises were available to the assessee on lease for a period of 9 years only. The assessee did not have a right of renewal after the expiry of the period of nine years.
7. During the course of hearing before us the learned AR of the assessee strongly placed reliance on the judgment reported in 242 TTR 22(Gauhati), 253 ITR 783 (Del) : 258 ITR 380(Bom) and 282 ITR 538 (Mad.). As to the treatment given in the books of account, the learned AR of the assessee submitted that in Schedule V to the Balance-Sheet, what was described as depreciation was in fact spread over of the entire expenditure for a period of three years. That was done because no part of the expenditure could be retrieved once the assessee vacated the leased premises. As far as internal wiring was concerned that expenditure was not retrievable. Expenditure for installation of LAN system was also having regard to the area and lay out of the leasehold premises. That mainly included of wires and switches and expenditure on wires and switches could hardly be called capital expenditure.
8. In his rejoinder, the learned DR argued that the expenditure was not in the nature of repair and maintenance. It was expenditure incurred on setting up of office premises in the first year of lease.
9. We have carefully considered the rival submissions. In the impugned order the learned CIT(Appeals) has proceeded on the basis that his predecessor CIT(Appeals) by his orders dated 1^st February, 2000 and 15^th December, 2000 for assessment years 1996-97 and 1997-98 had allowed the similar claims of assessee. During the course of hearing before us also the learned Counsel for the assessee argued that revenue had not gone in appeal for assessment years 1996-97 and 1997-98 and for the sake of consistency the same position should obtain in the case of the assessee for assessment year 1999-2000. There is no force in these contentions. In the instant case we are concerned with expenditure incurred by the assessee on the permise leased from M/s High Rise Properties Ltd. on 21.11.1997 and from M/s DLF Commercial Developers on 9.1.1998. These premises, therefore, were not in picture at all for assessment years 1996-97 and 1997-98 where the nature and scale of expenditure allowed by the learned CIT(Appeals) is altogether different. Secondly, during the course of proceedings before the authorities below as well as before us the learned Counsel for the assessee argued that the premises in question had been taken on lease for a period of three years only and, therefore, there was no long-term benefit. From the agreements placed before us it transpired that the assessee had an assured right of renewal up to 9 years and there was nothing in the agreements that the lease could not be continued even thereafter.
10. At the outset we may state that there is not much help to the case of the assessee from the judgments in the case of B&A Plantations and Industries, 242 ITR ITR 22 (Gau.) and Madras Auto Services Pvt. Ltd. (supra) because those judgments have been delivered in relation to assessment years prior to the insertion of Explanation-1 of Section 32(1). We may also state here that the arguments of the assessee that considerable part of the expenditure was embedded in office premises not belonging to the assessee has to be treated of not much consequence because of Explanation-1 to Section 32(1). The purport and objective of Explanation-1 to Section 32(1) is to deal with precisely such argument that expenditure is irretrievably on leased premises. The mandate of the provision is that to determine the nature of expenditure it should be viewed as if the assessee is the owner of the premises. This aspect is quite clear by the judgment of Hon'ble Delhi High Court in the case of Rajdev Singh & Co. v. CIT 181 ITR 38 (Del). In that judgment the Hon'ble Delhi High Court have distinguished their earlier judgment in the case of Instalment Supply (P) Ltd. v. CIT (supra) because of insertion of the provisions of Section 32(1A) that are now finding place by way of Explanation-1 to Section 32(1). There is, thus, no doubt that for the purpose of determination of the nature of expenditure incurred by the assessee, the fact that the premises are lease hold must be ignored and it should be assumed that the premises belonged to the assessee. As to the judgment of Hon'ble Madras High Court in the case of CIT v. Hari Vignesh Motors (P) Ltd. 282 ITR 338(Mad.), the learned Counsel for the revenue conceded that the issue was covered by the judgment of Hon'ble Supreme Court in the case of CIT v. Madras Auto Services (P) Ltd. without noticing the provisions of Explanation-1 to Section 32(1) and impact of the amendment on the applicability of the judgment in the case of Madras Auto Services (P) Ltd. Similarly in the case of CIT v. Hede Consultancy Pvt. Ltd. 258 ITR 380 (Bom.), the judgment in the case of Madras Auto Services (P) Ltd. had been applied without noticing the provisions of Explanation-1 to Section 32(1) or its predecessor Section 32(1A). At any rate, the ratio of the judgment of Hon'ble Delhi High Court in the case of Rajdev Singh & Co. (supra) is quite clear and, therefore, the various decisions relied upon by the learned Counsel for the assessee in this behalf are not of much assistance to the assessee. Fact of the matter is that for the purpose of determination of the nature of expenditure under consideration before us, the fact that the premises are lease-hold must be ignored and it should be assumed that the premises belonged to the assessee.
11. We also must state that there is not much force in the contention of the assessee that the expenditure has been incurred for optimum utilization of available space and to run the assessee's business operations more efficiently. That argument could hold good if the expenditure was not in relation to a fixed capital asset. In the case before us the expenditure is predominantly related to what is by virtue of the provisions of Explanation-1 to Section 32(1), a fixed capital asset of the assessee and indeed so described in the accounts of the assessee. This distinction is quite clearly demarcated by Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. 124 ITR 1 (SC) at page 10 in the following words: There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future.
Once the expenditure is at the root of a fixed capital asset, the pertinent question to ask is whether the expenditure is on maintenance, repairs or restoration of the asset already in existence or the expenditure is with the objective to enhance or value add to that asset. In the instant case the expenditure has been incurred in the very first year of the acquisition of the premises. The expenditure has been incurred by the assessee so as to make the premises more posh and impressive befitting the business profile of the assessee company. The expenditure has been incurred with a view to bring a fresh advantage that is not already there. Such an expenditure would be an expenditure in the nature of capital expenditure, as held by Hon'ble Bombay High Court in the case of New Shorrock Spinning & Manufacturing Co. Ltd. 30 ITR 338 (Bom.). In that judgment the Hon'ble High Court, inter-alia, observed as under: The simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure for repairs what is really being done is to preserve and maintain an already existing asset. The object of the expenditure is not to bring a new asset into existence, nor is its object the obtaining of a new or fresh advantage. This can be the only definition of 'repairs' because it is only by reason of this definition of repairs that the expenditure is a revenue expenditure.
If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would not be an expenditure of a revenue nature but it would be a capital expenditure, and it is clear that the deduction which the Legislature has permitted under Section 10(2)(v) where the expenditure is a revenue expenditure and naot a capital expenditure.
We may point out here that the aforesaid judgment of Hon'ble Bombay High Court as well as the extract therefrom as above quoted, have received the seal of approval of Hon'ble apex court in the case of Ballimal Naval Kishore 224 ITR 414 (SC).
12. As to the judgment of Hon'ble Supreme Court in the case of L.H.Sugar Factory & Oil Mills, 125 ITR 293 (SC) and the judgment of Hon'ble Delhi High Court in the case of CIT v. Shriram Refrigeration Industries Ltd., 253 ITR 783 (Del), we find that none of the two judgments affect the legal position as discussed at length by us in paragraphs 10 & 11 above. In the case of L.H. Sugar Factory & Oil Mills, the assessee was manufacturing sugar in a factory situated in Pilibhit district of Uttar Pradesh. The assessee contributed a sum of Rs. 50,000/- towards construction of a road in that area to meet his obligation under the Sugarcane Development Scheme. The assessee's claim of deduction was denied by revenue on the ground that it facilitated running of assessee's motor vehicles for transportation of sugarcane that was a long term advantage and, therefore, expenditure was of capital nature.
On these facts the Hon'ble Supreme Court held that the expenditure was of revenue nature in the following words: Now it is clear on the facts of the, present case that by spending the amount of Rs. 50,000, the assessee did not acquire any asset of an enduring nature. The roads which were constructed around the factory with the help of the amount of Rs. 50,000 contributed by the assessee belonged to the Government of Uttar Pradesh and not to the assessee. Moreover, it was only a part of the cost of construction of these roads that was contributed by the assessee, since under the sugarcane development scheme, one third of the cost of construction was to be borne by the Central Government, one third by the State Government and only the remaining one third was to be divided between the sugarcane factories and sugarcane growers, These roads were undoubtedly advantageous to the business of the assessee as they facilitated the transport of sugarcane to the factory and the outflow of manufactured sugar from the factory to the market centres. There can be no doubt that the construction of these roads facilitated the business operations of the assessee and enabled the management and conduct of the assessee's business to be carried on more efficiently and profitably. It is no doubt true that the advantage secured for the business of the assessee was of a long duration in as much as it would last so long as the roads continued to be in motorable condition, but it was not an advantage in the capital field, because no tangible or intangible asset was acquired by the assessee nor was there any addition to or expansion of the profit making apparatus of the assessee.
Here again the argument that prevailed was that road in question belonged to the state government and not to the assessee and, therefore, in so far as the assessee was concerned, no tangible or intangible asset was acquired by the assessee. Expenditure in that case, qua that assessee, was not in capital field; whereas in the case of the assesseee before us the expenditure is predominantly in capital field. As to the judgment of Hon'ble Delhi High Court in the case of CIT v. Shriram Refrigeration Industries Ltd., the following expenditure incurred by the assessee was treated by revenue to be expenditure of capital nature:6. Wall pelmets/apaintiage 13,326 -------- On assessee's appeal the Tribunal held that the entire expenditure was of revenue nature because the same had been incurred on rented premises. On revenue's appeal the Hon'ble Delhi High Court held as under: We find that the Tribunal has not addressed itself as to the applicability of Section 32(1A) even though that was the main challenge. It is more so in the case of wooden partitions. In that view of the matter we feel it would be appropriate for the Tribunal to rehear the appeal only to the limited extent of applicability of Section 32(1A) to the claim relatable to wooden partitions. So far as other expenses are concerned, we do not find any infirmity in the conclusions of the Tribunal to warrant any interference.
13. It is thus seen that in the case of Shriram Refrigeration Industries Ltd. also Hon'ble Delhi High Court have taken note of change in the legal position after the promulgation of the provisions of Section 32(1A), now Explanation-1 to Section 32(1). Moreover in that case the Hon'ble Delhi High Court have held that expenditure incurred on wooden partition was possibly an expenditure of capital nature. The other expense were in the nature of repairs only and therefore, we find that the judgment of Hon'ble Delhi High Court in the case of CIT v.Shriram Refrigeration Industries Ltd. relied upon by the assessee is against the assessee.
14. In the instant case the expenditure incurred by the assessee and depreciation allowed by the Assessing Officer is as under:12.
Fittings & Fixtures 21.67.987/- 10% 2,16,798/- 3,19.93,825/- 36,98,709/- 15. We find that the expenditure has been incurred as a part of overall enhancement and improvement of the available premises with a view to acquire a fresh benefit or advantage. For that purpose the assessee has incurred an expenditure of Rs. 1,26,57,696/- by wav of interior work at Delhi and of Rs. 54.81.444 - by way of interior work at Bombay. Besides an expenditure of Rs. 5,17,000/- has been incurred on roof insulation.
Apart from these expenses the other expenses cannot be said to be related to building premises, except that they have been installed at the leased premises. The expenditure is on new installation for the purpose of heating and cooling of the premises and for the purpose of communication network and demarcation of the premises among employees.
The expenditure is in the nature of new installation and not in the nature of repairs and renovation. During the course of hearing before us the assessee has argued that the expenditure was on wires, hubs, switches, modems etc. We do not agree. The expenditure is to bring into existence a sophisticated communication system to bring about connectivity of the assessee's office in Delhi and Bombay with other establishments of the assessee in India and abroad. The expenditure is not merely on wires and cables etc. but expenditure is on installation of sophisticated network. Taking into consideration all these aspects we hold that the assessee was not at all justified in treating such expenditure as part of repairs and renovation.
16. In view of the discussion in the foregoing paragraphs, we reverse the order of the learned CIT(Appeals) and restore the treatment given by the Assessing Officer in the assessment order in relation to expenditure of Rs. 3,19,93,825/-.
17. Ground of appeal No. 2 is directed against disallowance of a sum of Rs. 6,88,150/- claimed by the assessee as business expenditure on the ground that the expenditure had no direct bearing on the business of the assessee. Facts of the case leading to this ground of appeal briefly are that these amounts had been paid by the assessee to such parties as Educational Institute at Savli, Baroda, India Paint Conference etc. The learned Assessing Officer held that this expenditure did not have nexus or business connection with the assessee's business. He, therefore, disallowed the assessee's claim of deduction of Rs. 6,88,150/-. During the course of hearing before the learned CIT(Appeals), the assessee submitted that the expenditure mainly comprised of the following:i) Paid to Navrachna Education Institute, Savli, Baroda.
1,50,000/-ii) Hiring of a stall at India Paint Conference 2,50,000/-iii) Paid to CII for co-sponsoring InternationalConference on clean technologies.
2,00,000/-iv) Membership fee for Crop Protection Association 50,000/-v) Purchase of jerseys carrying the company'slogo paid to American Support Activity Association.
24,500/-vi) Paid to United Way for orgaising Garbafestival in Baroda.
10,000/-vii) Donation to Sant Kabir School 12,000/- The learned CIT(Appeals) considered the submissions of the assessee. He held that the expenditure of Rs. 1,50,000/- paid for building of compound wall of the school and the provision of chairs, tables and stationery was allowable business expenditure, in view of the judgment of Hon'ble Delhi High Court in the case of CIT v. Bharat Commerce & Industries Ltd., 184 ITR 90(Del). The expenditure of Rs. 2,50,000/- for the stall at India Paint Conference; Rs. 2,00,000/- for sponsorship of International Conference on clean technologies and Rs. 50,000/- paid to Crop Protection Association towards membership fee, all related to the business of the assessee and, therefore, were allowable as business expenditure. The learned CIT(Appeals) also allowed deduction of Rs. 12,000/- being donation to Sant Kabir School; Rs. 10,000/- for Garba festival and Rs. 12,500/- for subscription to ACSA as being advertisement expenditure.
18. During the course of hearing before us the learned DR argued that the reliance placed by the learned CIT(Appeals) on the judgment of Hon'ble High Court in the case of Bharat Commerce & Industries Ltd. (supra) was misplaced. In that case donation had been made to a school where the children of the employees of that company were studying. No such nexus with school at Savli was shown by the assessee and, therefore, the expenditure was donation simplicitor and if at all eligible for deduction Under Section 80-G. The learned D.R. argued that sponsorship of various conferences did not have a direct relation with the assessee's business and, therefore, the expenditure was mainly in the nature of donation. The learned AR of the assessee pointed out that Savli was the place where assessee's factory was situated and the children of assessee's workers were availing of educational benefits of the school to which the assessee contributed Rs. 1,50,000/- for building of compound wall and for provision of chairs, tables and stationery.
19. We have carefully considered the rival submissions. In the case of Bharat Commerce & Industries Ltd.(supra), Hon'ble Delhi High Court allowed deduction to that assessee of donation made to the school because majority of the children studying in that school were children of the employees of that assessee. In the instant case the learned A.R.of the assessee has orally said so during the course of hearing before us, but he has placed reliance on no material whatsoever in that behalf. We, therefore, restore this issue to the file of the learned Assessing Officer with the direction to grant the assessee an opportunity to establish that majority of the students in that school were children of assessee's employees. Thereafter the learned Assessing Officer may decide this issue afresh in accordance with law. As to the contributions made by the assessee for sponsoring International Conference on clean technologies and for hiring a stall at India Paint Conference and for membership fee of Crop Protection Association, these are expenses related to the business being carried on by the assessee and, therefore, the expenditure was incurred for the purposes of the business of the assessee. There is no reason to hold that these expenses were incurred for considerations other than business purpose of the assessee. The expenditure of Rs. 12,500/- for purchase of jerseys bearing assessee's logo is also an expenditure in the nature of advertisement and, therefore- allowable as business expenditure We hold that the learned CJT(Appeals) erred in allowing the expenditure of Rs. 10,000/-paid towards Garba festival in Baroda as business expenditure.
The expenditure was in the nature of donation. We hold accordingly.
20. Ground of appeal No. 3 is directed against disallowance of the sum of Rs. 4,00,178/- being provision for doubtful debts and Rs. 41,73,107/-being provision for damage in stock made by the Assessing Officer while computing book profit for the purpose of levy of tax Under Section 115JA of the Act. The learned Assessing Officer held that these two amounts were required to be added to the net profit of the assessee as per P & L account, in view of Clause (c) of Explanation appended to Section 115JA. On assessee's appeal the learned CIT(Appeals) held that provision for these amounts were ascertained liability and, therefore, Clause (c) was wrongly applied by the learned Assessing Officer. For that purpose he relied upon the judgment of Hon'ble Bombay High Court in the case of CIT v. H.J. Forgings (P) Ltd. 251 ITR 15 (Bom). The learned CIT(Appeals) held that the assessee was engaged in the business of insecticides and the products had a limited shelf life. The provision of Rs. 41,73,107/- comprised of obsolete/useless stock. Besides, certain shortages were reported on account of leakage of stock during transportation and storages.
Therefore, these amounts related to ascertained liability. The learned CIT(Appeals) also referred to the judgment of Hon'ble Supreme Court in the case of Apollo Tyres v. CIT 255 ITR273 (SC) and held that if the accounts of the assessee were prepared in accordance with Part-II and Part-Ill of Schedule VI of the Companies Act, the Assessing Officer was not empowered to disturb the book profits He. therefore, directed the Assessing Officer to work out the assessee's book profits as shown by the assessee.
21. During the course of hearing before us the learned D.R. pointed out that the assessee debited provision for doubtful debts- Rs. 4,00,178/-and provision for damaged stock- Rs. 41,73,107/- as selling, administration and other expenses after reducing the amount of sundry debtors and inventory of finished goods by the same amounts. The assessee did not furnish any basis for these entries and, therefore, the learned Assessing Officer has rightly added back the same as unascertained amounts while working out the assessee's tax liability Under Section 115JA.22. On consideration of the matter we find that the Assessing Officer has simply added back these amounts as they were described as provision and in the opinion of the learned Assessing Officer the same were required to be added back as per Clause (c) of Explanation to Section 115JA(2). We find that the learned Assessing Officer has proceeded on an entirely incorrect basis because both the provisions related to the assets and not any liabilities incurred by the assessee. Therefore, there was no question of these amounts representing any unascertained liability. The learned Assessing Officer otherwise did not enquire into the matter and there is no material to hold that these amounts have been arbitrarily provided for by the assessee. In these circumstances, we hold that addition of these amounts to book profit is without any basis. We, therefore, decline to interfere in the order of the learned CIT(Appeals) in this behalf.