(a) Income tax paid or payable or any provision thereof.
The amount of income tax shall include the following :
(i) any tax on distributed profits u/s 115-O or on distributed income u/s 115R;
(ii) any interest charged under this Act;
(iii) surcharge, if any, as levied by Central Acts from time to time;
(iv) Education cess on income tax, if any, as levied by the Central Acts from time to time; and
(v) Secondary and Higher Education cess on income tax, if any, as levied by the Central Acts from time to time.
Thus, Wealth Tax, Sales tax etc. are not to be added back while calculating ‘Book Profit’.
(b) Transfer to any reserve
Thus following transfers are to be added back if debited
(i) Transfer to sinking fund
(ii) Transfer to General reserve
(iii) Transfer to Dividend Equalisation Reserves and other transfer
(iv) Transfer to Bad Debt reserve or provision for doubtful debts.
However, if any transfer is made to Shipping reserve specified under section 33 AC, then it is not to he added to Net profit. It was operative for assessment years 2003-04 and 2004-05. The shipping reserve u/s 33AC has been discontinued with effect from assessment year 2005-06.
(c) Provisions for unascertained liabilities
Any provision made for any unascertained liability is also to be added to Net profit while calculating “Book profits”.
The Income tax Act does not provide any definition of ascertained liability or unascertained liability. For this, we will have to depend upon the General meaning of the term :
(d) An ascertained liability.
A liability is said to be ascertained liability if it is determined or fixed or imposed under some contract, law or other such act : For example, a provision made for compensation payable to the widow of an employee who died in the course of employment, where the said compensation is definitely to be paid as per court order. Similarly, provision made for gratuity payable to a retired employee, is also a provision made for meeting an ascertained liability and license it is not to be added to net profits. The provision for payment of Bonus to the employees in accordance with the Payment of Bonus Act is an ascertained liability and it is not to be added back to net profit for calculation of book profits.
(e) An unascertained liability
is that liability, which is not determined /fixed and a provision is created for such anticipated liability then it is to be added to net profit.
It is important to note that the provision for bad and doubtful debts is not a provision for uncertained liability. It is so because, such a provison is made in respect of anticipated fall in the value of an asset (i.e., receivable by the Company) and not for any liability. Therefore, while calculating the amount of book profits, the provision for bad and doubtful debts shall not be added back. [C.I.T. vs. HCL Comnet Systems and Service Ltd. 305 ITR 409(SC).