Taxpublishers.in - Monday Corner Answer to the Quiz for the week (16 Jun 2025)

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Quiz for the week (16 Jun 2025): Olive (P) Ltd has filed its ITR for the assessment year 2023-24 where its income liable for income tax was computed based on ‘book profit’ computed under section 115JB. There are 2 issues in this regard viz., (i) Rs.20 lakhs debited to Statement of profit and loss towards debenture redemption reserve; and (ii) Rs.27 lakhs was debited towards wages being the sum withheld due to dispute with workers of the FY 2022-23 and on amicable settlement between the parties it was paid during the year. These were not added back while computing book profit under section 115JB. Decide the correctness of action. Best Answer : The query warrants reference to the Explanation 1 to section 115JB. Items listed therein have to be added back. In the given case, Rs.20 lakhs is debited to Statement of Profit and loss account to wards debenture redemption reserve. Clause (b) of the Explanation to section 115JB (1) says that “the amounts carried to reserves, by whatever name called (other than a reserve specified under section 33AC)”. Also, clause (c) says that “the amount or amounts set aside for provisions made for meeting liabilities, other than ascertained liabilities”. The Bombay High Court in CIT v. Raymond Ltd. 2012 TaxPub(DT) 3280 (Bom-HC) : (2012) 071 DTR 0249 dealt with a similar issue. Its observation was that where a company issues debentures, the liability to repay arises the moment the money is borrowed. By issuing debentures a company takes a loan against the security of its assets. Though the loan may not be repayable in the year of account, the obligation to repay is a present obligation. Hence any money set apart in the accounts of the company to redeem the debenture has to be treated as moneys set apart to meet a known liability. Consequently, debentures have to be shown in the balance sheet of the company as a liability. Being moneys set apart to meet a known liability, a Debenture Redemption Reserve (DRR) cannot be regarded as a reserve for the purpose of Schedule VI to the Companies Act, 1956. Therefore, amount set apart as a DRR is not a reserve within the meaning of Explanation (b) to section 115JB and is not to be added to net profits for computing book-profit. As regards wages withheld by the company, the liability had not crystallised in the current year. The management deliberately withheld the amount which ought to have been claimed in the earlier year. If the liability for wages had crystallized during the relevant assessment year then it should not be considered as prior period expenditure. If the wage payments were made pursuant to a settlement agreement with employees, which was finalized during the assessment year then the same is not to be added to net profits for computing book-profits. CIT v. Ramakrishna Mills (CBE) Ltd (2024) 476 ITR 161(Mad). Therefore, if the wages were due (crystallized) in the earlier year but was deliberately withheld then it is a prior period item when debited in the later year. But if the liability has not crystallized in the earlier year and became so only in current year then it is not a prior period item. Based on this the wages debited in the Statement of profit and loss has to be dealt with in the computation of book-profit under section 115JB. Gaurang Khakhkhar Rajkot

Quiz for the week (16 Jun 2025):

Olive (P) Ltd has filed its ITR for the assessment year 2023-24 where its income liable for income tax was computed based on ‘book profit’ computed under section 115JB. There are 2 issues in this regard viz., (i) Rs.20 lakhs debited to Statement of profit and loss towards debenture redemption reserve; and (ii) Rs.27 lakhs was debited towards wages being the sum withheld due to dispute with workers of the FY 2022-23 and on amicable settlement between the parties it was paid during the year. These were not added back while computing book profit under section 115JB. Decide the correctness of action.

Best Answer :

The query warrants reference to the Explanation 1 to section 115JB. Items listed therein have to be added back. In the given case, Rs.20 lakhs is debited to Statement of Profit and loss account to wards debenture redemption reserve. Clause (b) of the Explanation to section 115JB (1) says that “the amounts carried to reserves, by whatever name called (other than a reserve specified under section 33AC)”. Also, clause (c) says that “the amount or amounts set aside for provisions made for meeting liabilities, other than ascertained liabilities”.

The Bombay High Court in CIT v. Raymond Ltd. 2012 TaxPub(DT) 3280 (Bom-HC) : (2012) 071 DTR 0249 dealt with a similar issue. Its observation was that where a company issues debentures, the liability to repay arises the moment the money is borrowed. By issuing debentures a company takes a loan against the security of its assets. Though the loan may not be repayable in the year of account, the obligation to repay is a present obligation. Hence any money set apart in the accounts of the company to redeem the debenture has to be treated as moneys set apart to meet a known liability. Consequently, debentures have to be shown in the balance sheet of the company as a liability. Being moneys set apart to meet a known liability, a Debenture Redemption Reserve (DRR) cannot be regarded as a reserve for the purpose of Schedule VI to the Companies Act, 1956. Therefore, amount set apart as a DRR is not a reserve within the meaning of Explanation (b) to section 115JB and is not to be added to net profits for computing book-profit.

As regards wages withheld by the company, the liability had not crystallised in the current year. The management deliberately withheld the amount which ought to have been claimed in the earlier year. If the liability for wages had crystallized during the relevant assessment year then it should not be considered as prior period expenditure. If the wage payments were made pursuant to a settlement agreement with employees, which was finalized during the assessment year then the same is not to be added to net profits for computing book-profits. CIT v. Ramakrishna Mills (CBE) Ltd (2024) 476 ITR 161(Mad).

Therefore, if the wages were due (crystallized) in the earlier year but was deliberately withheld then it is a prior period item when debited in the later year. But if the liability has not crystallized in the earlier year and became so only in current year then it is not a prior period item. Based on this the wages debited in the Statement of profit and loss has to be dealt with in the computation of book-profit under section 115JB.

Gaurang Khakhkhar
Rajkot