Prior period expenses allowable as a deduction from book profits while computing MAT – Madras HC

Tamil Nadu Cements Corporation Ltd. v JCIT [TC(A). No. 1123 of 2005] (Madras High Court)


The assessee during the relevant assessment year deducted prior period expenses of Rs 96,94,693 from book profits while computing MAT under section 115JA. The Assessing Authority viewed that as per the provisions of the Companies Act, prior year adjustments could not be reduced for arriving at the net profit of that particular year. The AO held that the computation done by the assessee was not in accordance with Section 115JA of the Act.

Assessee’s contentions:

  • The profit and loss account computed for the year under consideration was made after taking into consideration the prior year expenses as given under Schedule ‘S‘.
  • Reliance is placed on the decision of the Apex Court in Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 to contend that while computing the book profit under Section 115JA, the jurisdiction of the Assessing Officer is limited to examine whether the books of account having been properly maintained in accordance with the Companies Act. The Assessing Officer, thereafter, has the limited power of making increases and reductions as provided for in the Explanation to Section 115JA.
  • The assessee’s case is covered by decision of the Delhi High Court in CIT v. Khaitan Chemicals &Fertilizers Ltd. [2008] 307 ITR 150

Tax Authority’s arguments:

  • The assessee had not charged the prior year expenses to the profit and loss account. It was deducted from the profit after computing the same.


  • The Apex Court in Apollo Tyres (supra) pointed out that Sub-section (1A) of Section 115J does not empower the Assessing Officer to embark upon a fresh inquiry with regard to the entries made in the books of account of the company.
  • Assessing Authority has a limited jurisdiction to satisfy himself that the accounts are maintained in accordance with the provisions of the Companies Act. Beyond that, the Assessing Authority has no jurisdiction to go further into accounts.
  • Prior period items are also enumerated in paragraphs 15 and 19 of Accounting Standard-5. Dealing with the above said Accounting Standard-5, the Delhi High Court in the case of Khaitan Chemicals &Fertilizers Ltd. pointed out that the income or expenses relating to prior period items, merit to be included in the determination of net profit or loss.
  • The Delhi High Court held that whether the prior period expenses were shown separately or not, the assessee would nevertheless be entitled to have the adjustment of the prior period expenses in the matter of computing the net profit of the assessee.
  • In the light of the law declared by the Apex Court as to the jurisdiction of the officer in respect of the matter of MAT assessment, we have no hesitation in holding that once the officer accepts the book profit, he cannot travel beyond what had been disclosed in the book profit. In the matter of granting adjustment to the prior period expenses, we have no hesitation in applying the decision of the Delhi High Court in Khaitan Chemicals & Fertilizers Ltd. (supra)¬†thereby set aside the order of the Tribunal.

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