DCIT vs. Garware Polyester Ltd (ITAT Mumbai)

The sole dispute raised is, whether the Assessing Officer could have made adjustment to the book profits for an amount of Rs. 3,52,78,000/-, which was on account of waiver of principal amount of loan, which has been credited by the assessee directly in the Balance Sheet in ‘General Reserve’ account, which according to the Assessing Officer should have been routed through profit and loss account and thus, would have been part of the book profit. The provisions relating to book profit u/s 115JB are absolutely clear that same is to be computed on the basis of profit and loss account prepared in accordance with the provision of Part-II and Part-III of Schedule-VI of the Companies Act and to such profit only certain adjustments as provided in Explanation 1 can be made. The Assessing Officer does not have the power to tinker with such accounts prepared as per Schedule VI and certified by the Auditors. Assessing Officer has also not specified categorically that as to how the Part II & III of Schedule VI has not been followed or is against the prescribed accounting standard there is a requirement of law that waiver of loan taken for utilizing capital expansion is to be routed only through profit and loss account and cannot be credited to the ‘General Reserve’, i.e. directly in the Balance sheet. Thus, the finding of the CIT(A) is purely in accordance with the provisions of the law and the principle laid down by the Hon’ble Supreme Court in the case of Apollo Tyres (supra). The Hon’ble Bombay High Court in the case of CIT vs Akshay Textiles Trading And Agencies (P) Ltd., reported in 304 ITR 401 and later on in the case of CIT vs Adbhut Trading Co. Pvt Ltd, reported in 338 ITR 94, following the aforesaid decision of the Hon’ble Supreme Court held that accounts prepared under the Companies Act and certified by the authorities under the said “Act” have to be accepted.