P.K. Bansal, A.M. - (1.) GROUND No. 1 in this appeal relates to the computation of book profit for the purpose of s. 115J. The Dy. CIT has arrived at the book profit at Rs. 16,42,535, while the assessee has computed the book profit at Rs. 8,21,555 as under : Rs. Rs. Net profit as per P&L a/c 16,42,535 Add : Bad debts recovered 8,325 --------- 16,50,860 --------- Less : Bonus for prior years 6,94,796 Prior year expenses 1,34,509 -------- 8,29,305 --------- Net profit for the year 8,21,555 --------- The assessee went in appeal before the CIT(A). The learned CIT(A) has directed the Dy. CIT for the recomputation of the profit for the purpose of s. 115J of the IT Act, 1961, by deducting the excess bonus paid at Rs. 6,94,796 during the year out of the net profit for the asst. yr. 1989-90. But the CIT(A) has confirmed the addition of the prior year expenses to the extent of Rs. 1,34,509 for the purpose of computation of profit under s. 115J of the IT Act, 1961. The assessee has come in appeal before us against the addition of the prior year expenses amounting to Rs. 1,34,509 in the net profit as worked out by assessee for the purpose of computation of net profit under s. 115J.
(2.) The assessee's authorised representative argued that the prior year expenses have been incurred by the assessee during the year and, therefore, charged to the appropriation account for the year under consideration. He explained that there is no difference in the expenditure to be charged below the line or above the line. Part II and Part III of Sch. VI to the Companies Act do not envisage any difference between the P&L a/c and P&L appropriation a/c. He drew our attention to pp. 2 and 3 of the order of the CIT(A) in which the CIT(A) allowed the excess bonus paid to be an allowable deduction for the purpose of s. 115J of the IT Act, 1961. The assessee's authorised representative vehemently relied on the decision of the Bombay Bench 'D' of the Tribunal in the case of National Rayon Corpn. vs. Dy. CIT (1994) 51 ITD 621 (Bom) and argued that the assessee's case is covered by the decision of the Tribunal aforesaid. The Bench invited the attention of the authorised representative towards the provisions of ss. 209, 210 and 211 of the Companies Act, 1956, which talk of the preparation of the financial accounts for a particular period. The learned Departmental Representative relied on the orders of the AO as well as the CIT(A) and argued that these expenses were not related to the period under consideration and, therefore, the AO is fully authorised under s. 115J(1A) to adjust the net profit as shown in the P&L a/c to make it in accordance with the provisions of Part II and Part III of Sch. VI of the Companies Act, 1956. According to him as per cl. (2) of Part II to Sch. VI of the Companies Act it is the basic requirement that the P&L a/c shall be so made out as clearly to disclose the result of the working of the company during the period covered by the accounts. Since the accounts relate for a particular period and the expenses do not represent to that particular period, the expenses were not debited to the P&L a/c of the assessee of that period and the nomenclature 'prior year' has been used only to distinguish these expenses from the period to which the financial statement of the assessee belonged. The learned Departmental Representative in this regard relied on the decision of the Hon'ble Supreme Court in the case of Haji Lal Mohd. Biri Works vs. CIT (1997) 224 ITR 591 (SC). We have considered the rival submissions and gone through the case laws cited by both the parties and also perused the material on record. We find that the facts of the case of the assessee are entirely different from the facts of the cases which have been relied upon by the authorised representative as well as by the Departmental Representative. The cases cited by both of them are not applicable to the facts of the assessee's case. Therefore, we are of the firm opinion that neither the assessee's authorised representative nor the Departmental Representative can seek any help from the citation of these cases. In the case of National Rayon Corpn. (supra) the assessee had made a provision in its books of accounts in respect of the ascertained liability, but in this case no such provision has been made by the assessee in respect of the ascertained liability. The prior year expenses have been charged to P&L Appropriation a/c by the assessee and not to P&L a/c. Sec. 115J(1A) requires that every assessee being a company shall for the purpose of this section prepare its P&L a/c for the relevant previous year in accordance with the provisions of Part II and Part III of Sch. VI to the Companies Act, 1956. There is an Expln. to s. 115J(1A), which stipulates that for the purposes of this section book profit means the net profit as shown in the P&L a/c for the relevant previous year prepared under sub-s. (1A) as increased by... Sec. 211(2) of the Companies Act, 1956 lays down that every P&L a/c of a company shall give a true and fair view of the profit or loss of the company for the financial year and shall subject as aforesaid comply with the requirements of Part II of Sch. VI so far as they are applicable thereto. Sec. 209 of the Companies Act, 1956 deals with the books of accounts to be kept by the company. Sec. 209(3) lays down that for the purpose of sub-s. (1) and sub-s. (2) proper books of accounts shall not be deemed to be kept with respect to the matter specified therein : (a)..... (b) if such books are not kept on accrual basis and according to the double entry system of accounting. Thus the section requires to make it obligatory on the companies to maintain accounts on mercantile system only. Sec. 211 r/w Part II of Sch. VI requires that the P&L a/c shall be so made out as clearly to disclose the results of the working of the company during the period covered by the accounts. Sec. 227 of the Companies Act requires the auditor of the company to report whether the company's P&L a/c gives a true and fair view of the profit or loss for its financial year. On a query from the Bench to the learned authorised representative whether the auditor has qualified his audit report on showing these expenses below the line, i.e., in P&L Appropriation a/c, the authorised representative said that no qualification is being made because the expenses were shown below the line. The nomenclature as given by the assessee to these expenses as 'prior year expenses' itself denotes without further evidence that the expenses do not relate to the period for which the financial statements were being prepared. Prior period items have been defined in the Accounting Standard of the Institute of Chartered Accountants of India as prior period items of material charges or credits which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior years. The Accounting Standard stipulates that the prior period items should be separately disclosed in the current statement of profit and loss together with their nature and amount in a manner that their impact on current profit or loss can be perceived. The auditor is expected to qualify his report in case the prior period expenses are charged to current year's P&L a/c. The Expert Advisory Committee of the Institute of Chartered Accountants of India in its book on Compendium of Opinions Vol. I at page 1-29 has expressed its opinion on a query relating to the presentation of prior year expenses in the P&L a/c as under : "The Companies Act does not envisage a P&L Appropriation a/c although such an account is often prepared in practice. Sometimes, the P&L a/c is divided into two parts referred to customarily as 'above the line' and 'below the line' respectively. The basic requirement which must be borne in mind is that the P&L a/c should disclose a true and fair view of the profit or loss for the year. Therefore, if the prior-year expense and/or receipts are material in amount, it is preferable that they should be reflected in such a manner that the current year's balance of profit or loss is fairly disclosed. One way in which this can be done in the case of the two-sided or horizontal form of P&L a/c, is to reflect the prior-year items in the appropriation section or in the section 'below the line' after a balance is struck 'above the line' indicating the current year's profit or loss. In the case of P&L a/c prepared in the vertical form, the same purpose can be achieved by arriving at the current year's result and thereafter adding or deducting therefrom, as the case may be, the prior-year items." Thus, on going through the provisions of ss. 209, 210 and 211 of Parts II and III of Sch. VI to the Companies Act we are inclined to hold that the AO has correctly recomputed the P&L a/c by adding thereto the prior year expenses so as to make the profit as shown in the P&L a/c in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act, 1956. The Explanation as given to s. 115J(1A) will apply only to the items which are shown in the Explanation. Prior period expenses can be added under s. 115J(1A) itself, but in our view the net profit while computing the book profit under s. 115J should have been taken as shown in the P&L a/c and not as shown in the P&L Appropriation a/c, which the AO has correctly taken. We, therefore, hold that no interference is called for with the order of the CIT(A) in not allowing the deduction of Rs. 1,34,509 relating to prior year expenses out of the profit for the year for the purpose of computation of book profit under s. 115J. We, therefore, dismiss this ground of appeal of the assessee.
(3.) THE second and third grounds relate to the disallowance of a sum of Rs. 4,000 out of telephone expenses and Rs. 8,618 out of motor car expenses on the plea that they do not relate to the business. THE assessee's authorised representative argued that the company is an artificial person created for the purpose of carrying on the business and, therefore, part of the expenses can never be regarded to have been incurred not for the purpose of the business. If the AO was of the firm view that these expenses are not incurred for the business of the assessee but for the personal purposes of the employees he could have applied the provisions of s. 40A(5) of the IT Act, 1961. We find substantial force in the argument of the assessee's authorised representative and we accordingly direct the AO not to disallow these expenses on the plea that these expenses have not been incurred for the purpose of business.;