[2025] 173 taxmann.

com 918 (Madras)[22-04-2025]

INCOME TAX : Where prior period expenses had crystallised and were incurred in
relevant financial year, such expenses were to be allowed in computation of book
profit under section 115JA, and revision under section 263 disallowing such claim
was unsustainable

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[2025] 173 taxmann.com 918 (Madras)

Section 115JA, read with section 263, of the Income-tax Act, 1961 - Minimum Alternate Tax
(Prior period expenses) - Assessment year 1998-99 - Assessee, a company engaged in
spinning business, filed return under regular as well as MAT provisions - Assessing Officer
accepted return as filed - Subsequently, Commissioner invoked revision under section 263
on ground that prior period expenses were wrongly deducted in computing book profit
under section 115JA - Accordingly, Commissioner passed revision order disallowing
adjustment of prior period expenses - It was observed that Department had not questioned
allowability, correctness, or quantification of said expenditure in regular computation of
income - Whether since said expenses, including bonus audit fees, power charges, had
crystallised during financial year relevant to assessment year 1998-99, they should be
considered for computing book profit under section 115JA - Held, yes - Whether, therefore,
revision under section 263 was unsustainable and was to be quashed - Held, yes [Paras 20,
21 and 27] [In favour of assessee]
FACTS

■ The assessee, a public limited company, was engaged in the business of spinning.
■ It filed its return of income under both regular provisions as and minimum alternate tax (MAT) provisions
of section 115JA. The assessment was completed accepting the return as filed.

■ Subsequently, the Commissioner invoked revision under section 263 on the ground that prior period
expenses amounting to Rs. 29.16 lakhs ought to have been added back in the computation of book profits
under section 115JA. Accordingly, a revision order was passed disallowing the adjustment.
■ On appeal, the Tribunal upheld the revision.
■ On the assessee’s appeal to the High Court:
HELD

■ The account reveals that the appellant has computed net profit at a sum of Rs. 114.88 crores for the year
ended 31-3-1998. This, according to the Department, must be the net profit for the purposes of income
 tax. Any adjustment made to this figure, according to them, would be an adjustment below the line,
impermissible both in terms of the Explanation to section 115JA. [Para 18]
■ The flaw committed by the assessee is in the presentation of the profit and loss account where the
expenditure in question has been presented after arriving at the net profit. Perhaps in the interests of
transparency, the assessee has classified the expenses in question as prior year expenses insofar as they
relate to expenditure in connection with bonus and other expenses that arose in connection with prior
years. However, the amounts have, in fact, admittedly, been crystallised and expended only in the
financial year relating to assessment year 1998-99. [Para 19]
■ Had this amount been taken into account prior to the computation of net profit, the Department might not
have put up any resistance in accepting the claim. An important point to note is that neither the
allowability of the claim, incorrectness of the expenditure nor quantification of the same have been
doubted by the Department in the regular computation of income. [Para 20]
■ Hence, while the argument of the Department to the effect that there should be no adjustment to net profit
after determination of the profit is technically correct, in the instant case, the adjustments made are
allowable adjustments that impact the net profit for the assessment year in question. The true picture
should not be lost by virtue of a quirk of presentation of the financials. [Para 21]

■ The order of the Tribunal confirming the proposal is also hyper technical. The Tribunal has proceeded on
the assumption that there is a profit and loss appropriation account which is erroneous as there is no such
account in the financials produced before us. [Para 22]

■ In the case of Tamil Nadu Cements Corporation Ltd. v. Joint Commissioner of Income-Tax, Special Range
II, Chennai [2012 (23) taxmann.com 145(Mad], this Court has considered the treatment of prior period
accounts in arriving at the book profit under section 115JA. The assessee in that case had prepared its case
on net profit as per profit and loss account after reducing the prior period expenses/extraordinary items.
This was contested by the revenue on the ground that reduction of prior period expenses did not find
mention in clause (i) to (ix) of Explanation to section 115JA(2). [Para 25]

■ Referring to the Accounting Standards (AS) and to the judgment of the Delhi High Court in
Commissioner of Income Tax v. Khaitan Chemicals & Fertilizers Ltd [307 ITR 0150 ] and Tamil Nadu
Cements Corporation Ltd. v. Joint Commissioner of Income-Tax, Special Range II, Chennai [2012 (23)
taxmann.com 145(Mad), relied upon by that assessee, this Court holds that AS – 5 stipulates that prior
period items are income or expenses which arise ‘in the current period’, as a result of errors or omissions
in the preparation of financial statement of one or more prior periods. [Para 26]
■ In the instant case, the components of bonus, internal audit fees and power charges had, admittedly, been
crystallized only in the relevant previous year. In such circumstances, it is all the more necessary that
these amounts must be taken into account for the proper determination of net profit or loss. [Para 27]

■ In light of the above discussion, it is viewed that the proposal for revision does not hold any merit. [Para
30]
CASE REVIEW

Commissioner of Income Tax v. Khaitan Chemicals & Fertilizers Ltd. [307 ITR 0150 ] (para 26) and Tamil
Nadu Cements Corporation Ltd. v. Joint Commissioner of Income-Tax, Special Range II, Chennai (2012) 23
taxmann.com 145 (Mad) (para 26) followed.
CASES REFERRED TO

Apollo Tyres Ltd. v. CIT [2002] 122 Taxman 562/255 ITR 273 (SC) (para 8), CIT v. Echjay Forgings (P.) Ltd.
[2001] 116 Taxman 322/251 ITR 15 (Bombay) (para 8), Saurashtra Cement & Chemical Industries Ltd. v.
CIT [1995] 80 Taxman 61/213 ITR 523 (Gujarat) (para 8), Tamil Nadu Cements Corporation Ltd. v. Jt. CIT
[2012] 23 taxmann.com 145/209 Taxman 58/349 ITR 58 (Madras) (para 23) and CIT v. GMR Industries Ltd.
[2020] 122 taxmann.com 8/425 ITR 504 (Karnataka) (para 24).
R. Vijayaraghavan, Ms. Subbaraya Aiyar Padmanabhan and Ramamani for the Appellant. Karthik
Ranganathan, Sr. Standing Counsel for the Respondent.
JUDGMENT

Dr. Anita Sumanth, J. - The substantial questions of law admitted for resolution are as follows:
"1. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the
prior period expenses amounting to Rs.29,16,167/- cannot be reduced from the book profits computed
under Section 115 JA of the Income Tax Act even if such expenses have been debited to the Profit and
Loss Account in the books and have been allowed in the assessment order for computing the income
under the normal provisions of the Income Tax Act 1961 for the assessment year in appeal?
2. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that Profit
and Loss appropriation account does not form part of the Profit and Loss account and as such any
amounts displayed under the Profit and Loss appropriate accounts has to be excluded while computing
Book Profits for the purpose of Section 115 JA of the Income Tax Act?
3. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the
ratio of the decision of the Supreme Court in the case of Apollo Tyres Ltd. V. CIT (255ITR 273)?"
2. We have heard Mr.Vijayaraghavan, learned counsel for the appellant and Mr.Karthik Ranganathan, learned
Senior Standing Counsel appearing for the respondent.
3. The petitioner is a Public Limited Company incorporated under the provisions of the Companies Act, 1956.
It carries on the business of spinning. The assessment year (AY) in question is 1998-99. Return of income had
been filed with computation of income, both under the regular provisions as well as computing Minimum
Alternate Tax (MAT) under Section 115JA of the Income Tax Act, 1961 (in short 'Act').
4. An intimation was issued under Section 143(1)(a) of the Act and the matter was taken up for assessment.
The assessment was completed on 13.11.2000 accepting the return filed, both under regular provisions as well
as under MAT. While so, a show cause notice/proposal dated 29.11.2001 was received for suo motu revision
under Section 263 of the Act. The Commissioner of Income Tax (CIT) was of the view that the assessing
authority ought to have added back prior period expenses as far as the computation of MAT was concerned
and hence proposed to revise the assessment as being both erroneous and prejudicial to the interests of the
revenue.
5. The appellant had explained that the prior period expenses were, in fact, not incurred in the prior period but
were incurred only in the previous year in question. There were two components of the expenses. The first
was of a sum of Rs.26,59,755/-, representing bonus which became payable on the basis of a settlement
agreement entered into in financial year (FY) 1997-98. Hence, it was the appellant's case that the liability had
crystallised during the present assessment year only.
6. The second component related to internal audit fees and power charges. In both instances, there had been an
upward revision of the amount/additional demand made by the electricity department during the relevant
financial year though relating to earlier years. Hence, though categorised as prior period expenses, the
expenditure had incurred only in the relevant financial year, as the liability had been crystallised only then.
7. Overriding the objections raised, the CIT passed an order on 26.02.2002 disallowing the amounts only in
the computation of book profits under Section 115JA. As the computation under normal provisions of the Act
had not been disturbed, the assessment under Section 143(3) in so far as it related to computation of income
under normal provisions has attained finality.
8. The CIT had also opined that the judgment of the Supreme Court in the case of Apollo Tyres Ltd., V. CIT
[2002] 122 Taxman 562/255 ITR 273 (SC) and of the Bombay and Gujarat High Courts in CIT v. Echjay
Forgings Pvt. Ltd. [2001] 116 Taxman 322/251 ITR 15 (Bombay) and Saurashtra Cement & Chemical
Industries Ltd. v. CIT [1994] 80 Taxman 61/[1995] 213 ITR 523 (Gujarat) which had been relied upon by the
appellant would be of no avail to it.
9. The assessee filed an appeal before the Income Tax Appellate Tribunal ('ITAT'/'Tribunal') assailing the
assumption of jurisdiction as well as the direction of the CIT to modify the order of assessment dated
13.11.2000 adding back the expenses amounting in toto to a sum of Rs.29,16,167/-. The Tribunal concurred
with the CIT.
10. The Tribunal was of the view that the adjustment of prior period expenses from the net profit of the
current year was in contravention of accounting norms. It was also of the view that as the prior period
expenses had been certified by the auditor and approved by the Company in the Annual General Meeting
(AGM) prior to filing before the Registrar of Companies (ROC), the ratio of the judgment in Apollo Tyres1
should apply to the assessee also.
11. Hence, the assessee could not approbate and reprobate, meaning that the books of accounts could not be
accepted for the purpose of Companies Act and rejected for the purpose of Income Tax Act. Hence, the
Tribunal concluded stating that the adjustment in book profit providing for prior year expenses was not
permitted under the provisions of Section 115JA of the Act and that the judgment of the Supreme Court in
Apollo Tyres (supra) stood in the way of the appellant's claim.
12. Learned counsel for the appellant would reiterate the position that the expenditures, though under the
nomenclature prior period expenses ', had been incurred only in the current year. He would emphasize that the
preparation of the accounts had been in consonance with the Accounting Standards. Moreover, Section 115JA
of the Act contain an explanation defining 'book profit' to mean the net profit as shown in the profit and loss
account for the relevant year.
13. This is the starting point for the computation and it is this amount that would have to be either increased or
reduced by various amounts as stipulated in the clauses under the Explanation to Section 115JA. According to
him, this is exactly how the appellant has also proceeded to compute the book profits and hence there is no
infirmity in the manner of its computation.
14. Per contra, learned Standing Counsel would point out that the assessee was blowing hot and cold. While
on the one hand it argues that it is the accounts as presented before the shareholders in the AGM and filed
with the ROC that form the basis of computation and that should be accepted for the purposes of the
Companies Act, it takes a different stand as far as the income tax proceedings are concerned seeking
adjustment of certain expenses from the net profit.
15. According to him, this approach is precisely what has been rejected per the judgement of the Supreme
Court in the case of Apollo Tyres (supra). Hence, the order of the Tribunal confirming the order under Section
263 of the Act is valid in law.
16. In order to understand and appreciate the rival contentions of the parties, it is necessary for us to see the
presentation of the profit and loss account by the assessee which is as follows:
17. The account reveals that the appellant has computed net profit at a sum of Rs.114,88,29,121/- for the year
ended 31.03.1998. This, according to the Department, must be the net profit for the purposes of income tax.
Any adjustment made to this figure, according to them, would be an adjustment below the line, impermissible
both in terms of the Explanation to Section 115JA as well as the ratio of the judgment in Apollo Tyres (supra).
18. What the appellant has done, is to reduce Rs.34,250/- (being donations and charity) plus Rs.2,56,412/-
(being internal audit fees and power charges) plus Rs.32,67,502/- (bonus paid in the current year relating to
the prior year being Rs.74,62,839/-) less provision made in the earlier year which was allowed in the
assessment for that year (being Rs.41,95,337/-, in all amounting to a sum of Rs.32,67,502/-) from the net
profit.
19. In our view, the flaw committed by the appellant is in the presentation of the profit and loss account where
the expenditure in question has been presented after arriving at the net profit. Perhaps in the interests of
transparency, the appellant has classified the expenses in question as prior year expenses insofar as they relate
to expenditure in connection with bonus and other expenses that arose in connection with prior years.
However, the amounts have, in fact, admittedly, been crystallised and expended only in the financial year
relating to assessment year 1998-99.
20. Had this amount been taken into account prior to the computation of net profit, the Department might not
have put up any resistance in accepting the claim. An important point to note is that neither the allowability of
the claim, incorrectness of the expenditure nor quantification of the same have been doubted by the
Department in the regular computation of income.
21. Hence, while the argument of the Department to the effect that there should be no adjustment to net profit
after determination of the profit is technically correct, in the present case, the adjustments made are allowable
adjustments that impact the net profit for the assessment year in question. The true picture should not be lost
by virtue of a quirk of presentation of the financials.
22. The order of the Tribunal confirming the proposal is also, in our view, hyper technical. The Tribunal has
proceeded on the assumption that there is a profit and loss appropriation account which is erroneous as there
is no such account in the financials produced before us. Substantial question No.2 hence is returned as
unanswered in the present facts and circumstances of the case.
23. The Appellant has relied upon the decisions in the case of Commissioner of Income Tax v Khaitan
Chemicals & Fertilizers Ltd [307 ITR 0150 ] and Tamil Nadu Cements Corporation Ltd v Joint Commissioner
of Income-Tax, Special Range II, Chennai [2012 (23) taxmann.com 145(Mad].
24. The Respondent, for its part has relied upon the decision of the Karnataka High Court in Commissioner of
Income Tax, Bangalore v GMR Industries Ltd., [2020 (122) taxmann.com 8 (Karnataka)].
25. In the case of Tamil Nadu Cements Corporation Ltd.(supra), this Court has considered the treatment of
prior period accounts in arriving at the book profit under Section 115JA of the Act. The assessee in that case
had prepared its case on net profit as per profit and loss account after reducing the prior period
expenses/extraordinary items. This was contested by the revenue on the ground that reduction of prior period
expenses did not find mention in clause (i) to (ix) of Explanation to Section 115JA(2) of the Act.
26. Referring to the Accounting Standards (AS) and to the judgment of the Delhi High Court in Khaitan
Chemicals & Fertilizers Ltd. (supra) and to the other cases relied upon by that assessee, this Court holds that
AS - 5 stipulates that prior period items are income or expenses which arise ' in the current period\ as a result
of errors or omissions in the preparation of financial statement of one or more prior periods.
27. In the present case, the components of bonus, internal audit fees and power charges had, admittedly, been
crystallized only in the relevant previous year. In such circumstances, it is all the more necessary that these
amounts must be taken into account for the proper determination of net profit or loss.
28. In GMR Industries Ltd. (supra), relied upon by the revenue, the decision of this Court in Tamil Nadu
Cements Corporation Ltd. (supra) has not been taken note of.
29. Substantial question of law No.3 is incomplete both in the Tax Case (Appeal) and in the order of
admission dated 20.06.2012. We are of the view that the substantial issue arising for decision in this case has
been encompassed in substantial question of law No.1 and that the same would suffice to provide a proper
resolution of that issue.
30. In light of the above discussion, we are of the view that the proposal for revision does not hold any merit
and substantial question of law No.1 is answered in favour of the Assessee. This Tax Case (Appeal) is allowed
as indicated above.
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*In favour of assessee.