2005 (2) TMI 749 - AT - Income Tax

Minimum alternate tax - liability to be taxed u/s 115JA - Sale of shares as part of book profit in the Profit Loss Account - Capital gains tax - Difference between sale price and revalued price at which the shares were shown in the books of account - HELD THAT - Though there was capital gain on sale of shares under the Income-tax Act 1961 the sale proceeds were invested in specified securities under section 54EA and hence the capital gain which would otherwise have been chargeable to tax stood exempted from capital gains tax. Shares of one company were sold and shares of another company which were also specified securities u/s 54EA of the Income-tax Act were acquired. The Accounting Standards referred to in the assessment order were incorporated in section 211 of the Companies Act with effect from October 1998 and hence were not applicable for preparation of accounts under the Companies Act for the previous year under consideration. Nothing has been brought to our notice to suggest that the accounts of the assessee-company prepared and submitted before the Assessing Officer were either rejected or modified by the authorities under the Companies Act or not approved/adopted in the Annual General Meeting of the assessee-company. Thus the book profit of shown in the accounts of the assessee-company stood not only certified by the statutory auditors of the assessee-company but also accepted by all concerned under the Companies Act. In the case before us the accounts as also the book profits shown therein are duly certified by the statutory auditors of the assessee-company and the impugned adjustments sought to be made by the Assessing Officer are also not authorized by Explanation to sub-section (2) of section 115JA which is similar to Explanation to section 115J. Hence the adjustments made by the Assessing Officer to the book profit shown by the assessee in the Profit Loss Account cannot be sustained in law. Having considered all the facts and circumstances of the case before us in the light of the law laid down by the Hon ble Supreme Court in Apollo Tyres Ltd. s case 2002 (5) TMI 5 - SUPREME COURT and the Hon ble jurisdictional High Court in Kinetic Motor Co. Ltd. s case 2003 (1) TMI 47 - BOMBAY HIGH COURT wherein an identical issue was involved and decided against the Department we find no merit in the appeal filed by he Department. Appeal filed by the Revenue is therefore dismissed.

Summary

Issues Involved:
1. Whether the capital gains of Rs. 25,25,800 should be included in the book profit for the purposes of section 115JA of the Income-tax Act.
2. The applicability of the decision in CIT v. Veekaylal Investment Co. Pvt. Ltd.
3. The jurisdiction of the Assessing Officer to re-scrutinize the company's accounts certified under the Companies Act.

Detailed Analysis:

Issue 1: Inclusion of Capital Gains in Book Profit under Section 115JA
- The assessee-company revalued certain shares and recorded the difference in the Investment Revaluation Reserve Account. These shares were later sold at the revalued price, and no profit was shown in the Profit & Loss Account as there was no difference between the sale price and the revalued price.
- The assessee claimed exemption from capital gains tax under section 54EA by investing the sale proceeds in specified securities.
- The Assessing Officer (AO) held that the capital gain, deemed as income under section 45, should be included in the book profit for section 115JA purposes, adding Rs. 25,25,800 to the book profit.
- The CIT(A) reversed this, holding that the AO's adjustment was beyond the scope of section 115JA and that the judgment in Veekaylal Investment Co. Pvt. Ltd. was not applicable.

Issue 2: Applicability of CIT v. Veekaylal Investment Co. Pvt. Ltd.
- The learned Departmental Representative (DR) argued that the capital gain should be included in the book profit as per the Veekaylal Investment Co. Ltd. case.
- The learned Authorized Representative (AR) for the assessee countered that the facts of the present case were different from Veekaylal Investment Co. Ltd., where the assessee had shown capital gains in the Profit & Loss Account.
- The AR referred to the Tribunal's decision in ITO v. Ranjana Traders (P.) Ltd., which had decided a similar issue in favor of the assessee, distinguishing it from Veekaylal Investment Co. Ltd.

Issue 3: Jurisdiction of the Assessing Officer to Re-scrutinize Accounts
- The AR cited the Supreme Court's decision in Apollo Tyres Ltd. v. CIT, which held that the AO does not have the jurisdiction to go behind the net profit shown in the Profit & Loss Account, except to the extent provided in the Explanation to section 115J.
- The Bombay High Court in Kinetic Motor Co. Ltd. v. Dy. CIT reiterated that the AO could only examine whether the books were certified by the statutory auditors and make adjustments as provided in the Explanation to section 115J.
- The Tribunal observed that the accounts certified by the statutory auditors and accepted under the Companies Act should be the basis for computing income under section 115JA. The AO's adjustments were not authorized by the Explanation to section 115JA.

Conclusion:
- The Tribunal concluded that the AO's adjustments to the book profit were not sustainable in law, as they were beyond the scope of permissible adjustments under section 115JA.
- The appeal filed by the Department was dismissed, upholding the CIT(A)'s order that excluded the capital gains from the book profit.