The Chennai bench of the Income Tax Appellate Tribunal ( ITAT ) has held that leave encashment and employee provision for Gratuity is ascertained liability and allowable in book profit computation.
Fourrts (India) Labs Pvt. Ltd., the assessee company is engaged in the business of manufacturing of harmless medicines, and filed its return of income declaring a total income of Rs. 9,35,97,686/-. The assessment has been completed under section 143(3) of the Income-tax Act, 1961 (“the Act”) on 27.12.2016.
The AO determined the total income of Rs. 13,46,47,790/- by making various additions including additions towards sales promotion expenses u/s. 37(1) of the Act, towards freebies paid to Doctors amounting to Rs. 21,08,795/-, disallowance of deduction claimed u/s. 35(1) & (2) of the Act amounting to Rs. 75,69,617/-, disallowance of excess depreciation in addition to fixed assets amounting to Rs. 3,82,489/- and also the AO has recomputed book profit u/s. 115JB of the Act, by making additions towards provision for gratuity and leave encashment amounting to Rs. 2,32,57,147/-.
The assessee carried the matter in appeal before the first appellant authority, but could not succeed. The CIT(A), for the reasons stated in their appellant order dated 27.12.2016 rejected ground taken by the assessee and sustained additions made by the AO towards various expenses and also upheld re-computation of book profit u/s. 115JB of the Act.
The assessee has debited a provision for leave encashment and a provision for gratuity amounting to Rs. 2,32,57,147/-, but not added back said provisions while computing book profit u/s. 115JB of the Act. The AO re-computed book profit by making additions towards provision for leave encashment and provision for gratuity on the ground that provisions made for meeting liabilities other than ascertained liabilities need to be added back to book profit in terms of explanation (1)(c) to section 115JB of the Act.
A Coram comprising of Shri Mahavir Singh, Vice President and Shri G Manjunatha, Accountant Member observed that as per clause (c) of explanation (1) of section 115JB, only amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities are added back to the book profit computed u/s. 115JB of the Act.
It was observed that provisions for leave encashment and provision for gratuity are ascertained liability which is created based on actuarial valuation for service rendered by the employees and cannot be considered as an unascertained liability.
The AO without appreciating fact simply recomputed book profit by making additions towards provision for leave encashment and provision for gratuity. The Tribunal directed the AO to re-compute the book profit u/s. 115JB of the Act by excluding provision for leave encashment and provision for gratuity.
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