Section 115JB - Minimum Alternate tax

In the ITAT Jaipur Bench 'B' Maharaja Shree Umaid Mills Ltd. v. Assistant Commissioner of Income-tax, Circle-6, Jaipur Section 115JB, read with section 154, of the Income-tax Act, 1961 - Minimum Alternate tax - Assessment year 2002-03 - Whether deferred tax liability is neither income-tax 'paid' or 'payable' nor a 'provision' against same, but it is nevertheless an ascertained liability duly certified as such in terms of legally incumbent Accounting Standards under Companies Act - Held, yes - Whether, therefore, amount of deferred tax liability neither falls within ambit of clause (a) of Explanation to sub-section (2) of section 115JB nor within ambit of clause (c) thereof and, therefore, for purpose of section 115B, book profit does not need to be increased by amount of deferred tax liability - Held, yes Facts For the relevant assessment year, the assessee declared the total income at Rs. 71, 96,700. Since the tax payable on the total income for the relevant previous year was less than 7½ per cent of the book profit, computation of tax was made as per provisions of section 115JB. The book profit so computed was Rs. 4,51,95,130. The Assessing Officer, accordingly, completed the assessment. While computing the book profit under section 115JB, the assessee had not added back Rs. 1,14,24,000 which was shown in the balance sheet as provision for deferred tax debited to profit and loss account. Since the book profit was under-assessed by this amount, the Assessing Officer after giving opportunity under section 154 made rectification in the assessment order to recompute MAT under section 115JB. The order under section 154 was questioned before the Commissioner (Appeals) on two accounts. Firstly, the adjustment of Rs. 1,14,24,000 was permissible under Accounting Standard-22 and, secondly, under provisions of section 154, only such mistakes can be rectified which are apparent from record and not such mistakes which have two possible views for interpretations or which are debatable in nature. The Commissioner (Appeals) did not agree with the contentions of the assessee and upheld the action of the Assessing Officer under section 154. On appeal : Held The provisions laid down under section 115JB(2) are clear wherein under clauses ( a) to (c) of the Explanation, 'book profit' for the purpose of section 115JB has been defined as the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2) has increased by:— (a) "The amount of income-tax paid or payable, and the provision therefor; or (b) The amounts carried to any reserve, by whatever name called; or (c) The amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or ...." Thus, it is clear that as per clauses ( a) to (c) of Explanation to section 115JB(2), the book profit so arrived at is to be increased by the amount of income-tax paid or payable and the provisions therefor; or in respect of any reservation created by whatever name called for or on any amount or amounts set aside for making provision for unascertained liability. The deferred tax liability can be better understood as the liability, the existence as well as the quantum whereof as on the date of the balance sheet, is absolutely ascertained, determined and certified. In contrast, the 'provisions' are those amounts where the amount cannot be determined with substantial accuracy/certainty. Thus, where the existence as well as the amount is certain, it does not even need to be termed as a provision. The meaning of the word 'provisions' laid down under section 115JB is not clear towards the very nature of 'deferred tax liability' to be included in the book profit. Therefore, the mistake as had been attempted by the Assessing Officer could not be termed as apparent one to allow the Assessing Officer to rectify the same by invoking provisions of section 154. Since the interpretation of the provision was involved in the matter, the Assessing Officer was also not justified in invoking the provisions of section 154. Thus, the matter of increasing the book profit by the amount of deferred tax liability for the purpose of section 115JB in the instant case could not in any case had been dealt with and decided by invoking the provisions of section 154 and by passing an order under that provision because no patent, obvious or glaring mistake on the face of record as alleged was involved. The Commissioner (Appeals) had thus erred in holding that in the instant case no interpretation was involved, ignoring the material fact altogether that at least there were clear views to be contrary already stated in the guidelines expressly and specifically laid out by the Institute of Chartered Accountants of India (ICAI). Admittedly, these views were placed by the assessee before the lower authorities. Under these circumstances, the order passed under section 154 was beyond jurisdiction and liable to be set aside. The Assessing Officer did not agree with the assessee that deferred tax liability had not been added according to the Accounting Standard-22 issued by the Institute of Chartered Accountants of India. The lower authorities had considered the 'deferred tax liability' to be falling within the ambit of clause ( a) of the Explanation to section 115JB(2). The Commissioner (Appeals) had further considered the same to be alternatively falling within the ambit of clause (c) of the said Explanation. The Accounting Standard-22 titled as 'Accounting for taxes on Income' issued by the Institute of Chartered Accountants of India, prescribes the computation of deferred tax liability by taking into account the timing difference between the periods in which the tax liability becomes 'paid' or 'payable' as per law and to which the tax liability can be related with reference to the corresponding income earned. The deferred tax liability is the amount which is to be computed as per the prescribed method and is required to be accounted for in terms of and in accordance with the requirement of Accounting Standard-22 for 'Accounting for taxes on income', read with the provisions of sub-sections (3A) to (3C) of section 211 of the Companies Act, 1956. The deferred tax liability is neither income-tax 'paid' or 'payable' nor a 'provision' against the same. The deferred tax liability so recognized and accounted for in the books would run into current tax in the future years, because this liability is very much an existing liability due to timing difference. It is nevertheless an ascertained liability duly certified as such in terms of the legally incumbent Accounting Standards under the Companies Act. There was substance in the submission of the assessee that in future when the deferred tax liability would be getting converted into current tax and it would then necessarily be provided for as the current tax, then of course the same would be liable to be added back to the then net profit for the purpose of levying MAT then in terms of the clause ( a) of the Explanation to section 115JB(2). Accordingly, if the deferred tax liability is added back to the book profit first at the time when it is originally accounted and then it is also added back when in future it gets converted into current tax, it would obviously lead to a double addition of the same substance to the net profit, though actually the deferred tax liability accounted for earlier would itself be turning into the current tax liability in future. Even if the deferred tax liability, were called a 'provision', it is properly and methodically 'ascertained liability', and as such in no case the book profit can be increased by this sum. The item ( c) which is part of the Explanation appearing below sub-section (2) of section 115JB envisages increase of book profit by the provision made for liabilities other than ascertained liabilities which is ascertained one. Thus, the deferred tax liability does not fall within the ambit of clause ( c) of the Explanation to section 115JB(2) which requires the book profit to be increased by the amount or amounts set aside to provisions made for meeting the liabilities other than ascertained liability. Therefore, the amount of the deferred tax liability neither falls within the ambit of clause ( a) of Explanation to sub-section (2) of section 115JB being not the amount of income-tax paid or payable and the provisions therefor nor within the ambit of clause (c) thereof being an ascertained liability. Therefore, for the purpose of section 115JB, the book profit does not need to be increased by the amount of deferred tax liability. The action of the lower authorities in this regard was, accordingly, not justified. [Para 13] Therefore, the Assessing Officer was not justified in increasing the book profit by the sum of Rs. 1,14,24,000 being the deferred tax liability appearing in the profit and loss account. The CIT(A) had also erred in sustaining the same. Thus, while setting aside orders of the lower authorities on the issue, the Assessing Officer was directed to delete the addition of Rs. 1,14,24,000 so made. [Para 13.1] In the result, the appeal was allowed. [Para 14]