The Income Tax Appellate Tribunal (ITAT), Kolkata has held that a provision made according to the Accounting Standards of the Institute of Chartered Accountants of India (ICAI) can be excluded while computing book profit under Section 115JB(2) of the Income Tax Act, 1961.
In the instant case, the appellant-assessee claimed deduction of Mark to Market Loss of Rs 29,92,34,031/- while computing the book profits u/s 115JB of the Act. The Commissioner rejected the same by finding that the said loss is contingent in nature and hence required to be added back while computing the book profits u/s 115JB of the Act.
As per the Announcement of ICAI dated 29.3.2008 on Accounting for derivatives, as per which, an entity is required to provide for losses in respect of all outstanding derivative contracts on the balance sheet date by marking them to market.
While allowing the appeal of the assessee, the Tribunal noted that the announcement of ICAI in the form of Accounting Standards are mandatorily to be followed by every Indian company u/s 211(3C) of the Companies Act, 1956. “Hence a provision when made in accordance with the notified accounting standards u/s 211(3C) of the Companies Act, 1956 which is mandatory in nature and the same are subject to certification by the statutory auditors of the company that the said standards are followed or not, then the said provision cannot be considered as contingent in nature.”
“It was specifically clarified by the tax auditor himself before the ld AO that the said provision has not been considered as a contingent liability. However, since the said provision has been made as per the mandate provided by the accounting standards issued u/s 211(3C) of the Companies Act, 1956, the said provision is an ascertained liability and hence does not fall under any of the items mentioned in Explanation to section 115JB(2) of the Act. Hence the same was not added back to the book profits u/s 115JB of the Act,” the Tribunal said.
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