TMI Blog2009 (5) TMI 131X X X X Extracts X X X X X X X X Extracts X X X X ..... charge tax on book profit. The AO computed the book profit/total income under s. 115JB as under: "Income under s. 115JB Net profit as per P L a/c - 77,81,868 Dividend income under s. 10(33) - 1,34,770 ---------- 76,47,098 ---------- Rounded off - 76,47,100" ---------- 3.2 Against the AO's order in computing book profit under s. 115JB at Rs. 76,47,100, the assessee preferred an appeal before the learned CIT(A) by taking a ground that the net profit shown in the P L a/c at Rs. 77,81,868 includes a long-term capital gain of Rs. 40,57,545 not liable to be taxed in the light of the provisions contained in s. 54EC of the Act, and thus, the said amount of Rs. 46,57,545 is to be excluded from the net profit for the purpose of computing book profit under s. 115JB of the Act. In support thereof, the assessee relied upon the two decisions of the Tribunal in the case of Sutlej Cotton Mills Ltd. vs. Asstt. CIT (1993) 46 TTJ (Cal)(SB) 310 : (1993) 45 ITD 22 (Cal)(SB) and Oswal Agro Mills Ltd. vs. Dy. CIT (1994) 51 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion and refers to "special provision for payment of tax by certain companies". It has an overriding effect upon other provisions of the Act. It is applicable only in the case of a company. As per s. 115JB, the AO has to find out the normal tax liability as computed as per the normal provisions of the Act ignoring provisions of s. 115JB of the Act. Then the AO has to compute the "book profit". The net profit as per P L a/c after adjustment provided in the Explanation to s. 115JB is book profit. The Explanation to s. 115JB defines the words "book profit", which means "net profit" as shown in the P L a/c for the relevant previous year, and as increased by item Nos. (a) to (f) of the said Explanation if they are debited to the P L a/c and as reduced by item Nos. (i) to (viii) of the said Explanation. The figure arrived at after the above adjustment provided in the said Explanation is the "book profit" of the assessee for the relevant previous years. As per sub-s. (2) of s. 115JB, every assessee, being a company, shall, for the purpose of s. 115JB, prepare its P L a/c for the relevant previous year in accordance with the profits of Parts II and III of Sch. VI of the Companies Act, 1965. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of the provisions specifically provided in s. 115JB of the Act. In fact, the AO gets jurisdiction to make assessment under s. 115JB only when the income-tax payable on the total income as computed under the normal provisions of the Act is less than specified percentage of book profit as contemplated under the said section. While deductions, rebates and allowances provided in the Act are available in the computation of total income for normal assessment, additions, deductions and adjustments except to the extent covered by the Explanation to s. 115JB are not available in the computation of book profit. In other words, once the AO finds that income-tax payable on the total income as computed under the normal provisions of the Act is less than the specified percentage of book profit, he has to give up normal assessment and has to opt for the assessment under s. 115JB, which does not provide for any deduction in terms of s. 54EC of the Act. It is not in doubt that the deduction available to any assessee under s. 54EC is not an item included in the items specified in cls. (i) to (vii) of the Explanation so as to mandate that it is to be reduced from the net profit as shown in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nquiry in regard to the entries made in the books of account of the company." 13.1 On reading the aforesaid decision of the Hon'ble Supreme Court, it is clear that the AO does not have jurisdiction to go behind the net profits shown in the P L a/c except to the extent provided in the Explanation. It has also been observed by the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT that in the light of the fact that IT authorities were unable to bring certain companies within the net of income-tax because these companies were adjusting their accounts in such a manner as to attract no tax or little tax, and it is with a view to bring such of these companies within the tax net, the s. 115J was introduced in the IT Act with a deeming provision which makes the company liable to pay tax on at least 30 per cent by its book profits as shown in its own account, and for the said purpose, s. 115J makes the income reflected in the company's books of account the deemed income for the purpose of assessing the tax. 14. The said view taken by the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT has been reiterated by their Lordships of Supreme Court in the case of CIT v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year prepared under sub-s. (2), as increased by- (a) and (b) ............. (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (d) to (f) ............. if any amount referred to in cls. (a) to (f) is debited to the P L a/c, and as reduced by,-" From the above, it is evident that s. 115JA of the 1961 Act which refers to "deemed income relating to certain companies" has an overriding effect upon other provisions of the IT Act. It is applicable only in the case of a company. As per s. 115JA, the AO has to first compute the total income of the assessee as per the provisions of the IT Act. Thereafter, he has to compute 30 per cent of the book profit. Then he has to compare the total income as computed as per the provisions of the IT Act with 30 per cent of book profit computed, as per s. 115JA. If 30 per cent of the book profit is more than the total income, then 30 per cent of the book profit shall be deemed to be the "total income" of the assessee for such previous year. As per sub-s. (2), the assessee has to prepare the 'P L a/c' for the relevant previous year in accordance with the provisions of Parts II an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pressed by the company in the general meeting. The AO has only the power of examining whether the books of account are duly certified by the authorities under the Companies Act and whether such books have been properly maintained in accordance with the Companies Act. The AO does not have the jurisdiction to go beyond the net profit shown in the P L a/c except to the extent provided in the Explanation. Thereafter, the AO has to make adjustments permissible under the Explanation given in s. 115JA of the 1961 Act. It may be noted, that the adjustments required to be made to the net profit disclosed in the P L a/c for the purposes of s. 349 of the Companies Act are quite different from the adjustments required to be made under the Explanation to s. 115JA of the 1961 Act. For the purposes of s. 115JA, the AO can increase the net profit determined as per the P L a/c prepared as per Parts II and III of Sch. VI to the Companies Act only to the extent permissible under the Explanation thereto. 8. As stated above, the said Explanation has provided six items, i.e., item Nos. (a) to (f) which if debited to the P L a/c can be added back to the net profit for computing the book profit. In this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he accounts maintained in accordance with the provisions of Part II and Part III of Sch. VI to the Companies Act, which are certified by the auditors and laid before company in the animal general meeting. (b) The AO has only the power of examining whether the books of accounts are duly certified by the authorities under the Companies Act and whether such books have been properly maintained in accordance with the Companies Act. (c) The AO does not have the jurisdiction to go beyond the net profit shown in the P L a/c prepared in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act, 1956 except to the extent provided in the Explanation to s. 115J or 115JA or 115JB, as the case maybe. (d) The AO has power to make adjustments permissible under the Explanation given in s. 115J or 115JA or 115JB of the Act. (e) The adjustments required to be made to the net profit disclosed in the P L a/c for the purpose of s. 349 of the Companies Act are quite different from the adjustment required to be made under the Explanation to s. 115J or 115JA or 115JB of the Act. (f) For the purposes of s. 115J, 115JA or 115JB, the AO can increase or reduce the net profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cludible in P L a/c prepared under Part II and Part III of Sch. VI to the Companies Act. It is pertinent to note here that the assessee has not made any claim of deduction of capital gain (short-term) from the book profit, which goes to show that capital gain as such is not deductible from the net profit prepared in accordance with Parts II and III of Sch. VI to the Companies Act. Further, the distinction of capital gain as short-term and long-term is relevant only for the purpose of computation of income from capital gain and determination of tax payable thereupon under the normal provisions of IT Act, and has nothing to do with the preparation of P L a/c in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act. In these circumstances, so long as long-term capital gain is part of profit included in the P L a/c prepared in accordance with the provisions contained in Parts II and III of Sch. VI to the Companies Act, it cannot be excluded from the net profit unless so provided under Explanation to s. 115JB of the Act for the purpose of computing book profit under s. 115JB of the Act. In the absence of any provision for exclusion of capital gains in the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in sub-s. (1) of s. 115JB read with Explanation thereto. Not only starting point being the net profit as shown in the P L a/c prepared in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act but also the items, which are to be increased as stipulated in cls. (a) to (h), and the items, which are to be reduced as specified in cls. (i) to (vii), find separate mention in the scheme of the section itself. So, the computation of book profit is to be done strictly as per the Explanation to s. 115JB of the Act and no assistance from any other section of the Act can be taken for that purpose. The Hon'ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT and CIT vs. HCL Comnet Systems Services Ltd. has clearly laid down a law that the AO has the limited power of making increases and reductions to the net profit shown in the P L a/c except as provided for in the Explanation to s. 115J or 115JA. In other words, the Hon'ble Supreme Court has clearly held that the AO, while computing the book profits of a company under s. 115J or 115JA of the IT Act, 1961, has only the power of examining whether the books of account are certified by the authorities under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In support of this contention, the decision of Hon'ble Delhi High Court in the case of CIT vs. Sain Processing Weaving Mills (P) Ltd. (ITA No. 1128 of 2007, dt. 17th Dec., 2008) since reported in (2009) 17 DTR (Del) 215 was relied upon. 22. We have carefully gone through the aforesaid decision of Hon'ble Delhi High Court in the case of CIT vs. Sain Processing Weaving Mills (P) Ltd. From the said decision, it is evident that the current year's depreciation was not charged to the P L a/c by the assessee but instead, was disclosed along with the quantum of current year's depreciation computed in accordance s. 205(2) of the Companies Act, as per requirement of cl. 3(iv) of Part II of Sch. VI of the Companies Act, by way of a note to the accounts. The requirement of such disclosure on failure to provide for depreciation in the P L a/c as also, the quantum of arrears of depreciation flow from s. 211 r/w cl. 3(iv) of Part II of Sch. VI of the Companies Act. The reason being that there was an obligation cast on the company to present a true and fair view of its state of affairs to those who rely on its accounts. Thus, in the view of Hon'ble High Court, such disclosure in the notes t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn or disclosed in the accounts would form part of net profit shown in the P L a/c prepared in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act, and the "book profit", for the purpose of s. 115J or 115JA or 115JB, as the case may be, shall be computed accordingly. In our understanding, the view of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT and CIT vs. HCL Comnet Systems Services Ltd. to the effect that the AO has to accept the authenticity of the accounts maintained in accordance with the provisions of Part II and Part III of Sch. VI to the Companies Act being certified by the auditors and laid before the company in its general meeting, and that the AO has only the power of examining whether the books of accounts are duly certified by the authorities under the Companies Act and whether such books have been property maintained in accordance with the Companies Act gives ample support to the view of the Hon'ble Delhi High Court that the net profit as shown in the P L a/c would include such items also which are separately shown or disclosed in the notes to the accounts as per requirement of the Companies Act or Parts II and III of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be excluded from the amount of net profit as shown in P L a/c for the purpose of computing book profit under s. 115JB of the Act. From the facts of the present case and from the submissions of both the parties, it is clear that the claim of the assessee rests upon a footing that since the assessee has invested the amount of capital gain in specified schemes as per requirement of s. 54EC of the Act and thus, it being exempt under S. 54EC is not includible in the total income computed under the normal provisions of the Act, the amount of capital gain deductible under s. 54EC should also be reduced from the net profit as shown in P L a/c for the purpose of computing 'book profit' under s. 115JB, and in support of the contention that the net profit shown in the P L a/c can be tinkered with, a reliance was placed upon the decision of Hon'ble Delhi High Court in the case of Sain Processing Weaving Mills (P) Ltd. As already discussed above, it is true that the net profit shown in the P L a/c can be adjusted only by the items, which have been separately shown and/or disclosed in the accounts or notes to the accounts as per requirement of the provisions of Companies Act read with provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits or profits under s. 115J cannot include capital gains. In that case, the AO rejected this claim of the assessee. Learned CIT(A) also confirmed the assessment order but the Tribunal took the view that under the IT Act, 1961, capital gain is deemed to be income under s. 45. It is also held that the said section applies only to the limited extent and what is deemed to be income under s. 45 is not an income for book profit and on this basis, the Tribunal decided this issue in favour of the assessee. While holding so, the Tribunal followed the judgment of Special Bench of the Tribunal rendered in the case of Sutlej Cotton Mills Ltd. In Revenue's appeal, this issue was decided by the Hon'ble Bombay High Court in favour of the Revenue. The question before Hon'ble Bombay High Court was as to whether the income from capital gain should be included for the purposes of computing book profit under s. 115J of the Act. The findings of Hon'ble Bombay High Court are reproduced below: "We find merit in this appeal. According to s. 115(1), in the case of an assessee being a company if the total income is less than 30 per cent of its book profits then the total income of such company shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital gains should be included for the purpose of computing book profits. That, capital gains would certainly be one of the various items whose information is required to be given to the shareholders under the said cl. 3(xii)(b). So also, the disclosure is required to be made in respect of investment in the capital of a partnership firm if the company is a partner on the date of the balance sheet of the Companies Act by A. Samaiya, Fourteenth Edition). Similarly, profits or losses on such investments are also required to be disclosed [cl. 3(xii)(b) of Part II of Sch. VI to the Companies Act]. In the circumstances, the question is answered in the affirmative, i.e., in favour of the Department and against the assessee." 26. From the above, it can be seen that this claim of the assessee that capital gain cannot be part of book profit has been rejected by Hon'ble Bombay High Court. Hon'ble Bombay High Court has referred to cl. (2) of Part II of Sch. VI of the Companies Act and it is observed that where a company receives an amount on account of surrender of leasehold rights, the company is bound to disclose it in the P L a/c as non-recurring transaction or a transaction of exceptional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spute that the deduction available under s. 54EC is not covered under any of the items mentioned in the Explanation to s. 115JB of the Act. Therefore, in the light of the decision of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT and CIT vs. HCL Comnet Systems Services Ltd. and decision of Hon'ble Delhi High Court in the case of Sain Processing Weaving Mills (P) Ltd., the assessee's claim to reduce long-term capital gain exempt under s. 54EC from the net profit as shown in the P L a/c prepared under the Companies Act for the purpose of computing "book profit" under s. 115JB is not tenable on facts and as well as in the eyes of law. We further hold that the decision of Special Bench of the Tribunal rendered in the case of Sutlej Cotton Mills Ltd. is not applicable to the case in the light of authoritative judgment of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT and CIT vs. HCL Comnet Systems Services Ltd. and decision of Hon'ble jurisdictional Delhi High Court in the case of CIT vs. Sain Processing Weaving Mills (P) Ltd. where it has been laid down that the adjustments to the net profit as shown in the P L a/c prepared under the Companies Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 115JA of the Act. From the above decision of the Tribunal, Mumbai Bench in the case of ITO vs. Frigsales (India) Ltd., it is clear that the Tribunal has upheld the order of the learned CIT(A) in excluding capital gain exempted under s. 50 of the Act from the book profit determined under s. 115JA of the Act on the premises that in view of insertion of sub-s. (4) in s. 115JA for the first time, the book profit determined in s. 115JA has to be taxed after taking into consideration the other provisions of the Act and if the capital gain earned by the assessee is exempt under s. 50 of the Act, they will not form part of the taxable income and cannot be taxed as income under s. 115JA of the Act. The Tribunal further observed that s. 115J is a self-contained code whereas s. 115JA is not self-contained code but is a part of the Act by virtue of sub-s. (4) inserted for the first time in s. 115JA. The Tribunal further observed that the ratio of decision in the case of Apollo Tyres Ltd. vs. CIT is distinguishable because the same was rendered in the context of provisions of s. 115J, which is independent code, while s. 115JA is not an independent code and the legislature in then wisdom has br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hus, in the light of the decision of Hon'ble Supreme Court in the case of CIT vs. HCL Comnet Systems Services Ltd., the decision of Mumbai Tribunal in the ease of ITO vs. Frigsales (India) Ltd. making a distinction between ss. 115J and 115JA for the purpose of computing book profit under that section cannot be accepted. 30. Let us now look to the decision of Hon'ble Supreme Court in the case of CIT vs. HCL Comnet Systems Services Ltd. from one more angle. In that case, it was found that the assessee had debited certain amount on account of provision for bad debts to the P L a/c while computing book profit under s. 115JA of the Act. The AO added back the aforesaid item of provision for bad and doubtful debts to the book profit as per cl. (c) of Explanation to s. 115JA of the Act. The Hon'ble Supreme Court observed that the provision for bad and doubtful debt can be added back to the net profit only if Item (c) of Explanation stands attracted. Item (c) deals with amount(s) set aside as provision made for meeting liabilities, other than ascertained liabilities. The Hon'ble Supreme Court had taken a view that any provision made towards irrecoverability of the debt cannot be said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit under s. 115JB cannot be increased by adding capital gain. In that case, the Tribunal has observed as under: "28. Copies of these orders have been compiled at pp. 1 to 58 of the paper book. We find that in these orders various High Courts and Supreme Court decisions have been duly considered including Supreme Court decision in the case of Apollo Tyres Ltd. vs. CIT (2002) 174 CTR (SC) 521 : (2002) 255 ITR 273 (SC) and Bombay High Court decision in the case of CIT vs. Veekaylal Investment Co. (P) Ltd. (2001) 166 CTR (Bom) 96 : (2001) 249 ITR 597 (Bom). It has been consistently held by various Benches of the Tribunal that the book profit cannot be increased by adding capital gain. Since the issue is squarely covered as mentioned above, we direct the AO to exclude capital gain from the book profit for the purpose of s. 115JB." 31.1 From the said decision, it is evident that the Tribunal has, in a very short judgment, taken a view that the book profit cannot be increased by capital gain. It was, thus, a case where capital gain was added to the book profit implying thereby that the capital gain was not included in the net profit prepared by the assessee but was added to it whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken for that purpose. When cl. (iii) of Expln. (1) clearly states that, the amount of loss brought forward or unabsorbed depreciation, which is less as per books of account is liable to be reduced, in our considered opinion, there is no authority for falling upon the command of s. 72 for holding that the business loss is to be considered on year to year basis and not as an aggregate figure for all years in unison." 33. In connection to the view, we have taken above that the long-term capital gain, which is part of book profit included in P L a/c prepared in accordance with Part II and Part III of Sch. VI of Companies Act, 1956, even if exempted by operation of s. 54EC, cannot be excluded from computation of book profit under s. 115JB, we would like to place on record the decision of Hon'ble Kerala High Court in the case of N.J. Jose Co. (P) Ltd. vs. Asstt. CIT (2008) 217 CTR (Ker) 479 : (2008) 9 DTR (Ker) 61 : (2008) 174 Taxman 141 (Ker) where the matter has been discussed and decided in the following terms: "3. Learned senior counsel appearing for the Revenue, on the other hand, contended that no deduction can be allowed in the computation of book profit except to the exten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 115J(1A) of the Act. In the absence of any provision for exclusion of capital gains in the computation of book profit under the above provision, assessee is not entitled to the exclusion claimed. In other words, s. 54E has no application in the computation of book profit under s. 115J." 34. Considering the totality of the facts and circumstances of the case as discussed above and in view of the above reasons, we upheld the order of learned CIT(A) in holding that the long-term capital gain included in the net profit prepared under the Companies Act is not deductible from the net profit for the purpose of computing book profit under s. 115JB. We further hold that merely because the long-term capital gain is not liable to be taxed under the normal provision of the Act for the reason that the assessee has made investment in specified schemes as contemplated under s. 54EC, it is not correct to say that it is also to be reduced from the net profit for the purpose of computing deduction under s. 115JB when the Explanation to s. 115JB does not provide for any deduction in terms of s. 54EC of the Act. In other words, we hold that s. 54EC has no application in the computation of book p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds administrative and other related expenses incurred to earn exempted dividend income, which has been reduced to 15 per cent by the CIT(A). The Department is not in appeal against the order of learned CIT(A) in reducing the disallowance from 25 per cent to 15 per cent. Thus, the issue before us is to the extent of disallowance of 15 per cent of the dividend income on account of expenses incurred to earn dividend income. In the light of the facts and circumstances of the present case, we find that this issue is to be restored back to the file of the AO for his further adjudication in the light of the latest position of law with regard to the applicability of s. 14A of the Act. The AO shall examine the matter afresh and decide the same accordingly as per law after providing reasonable opportunity of being heard to the assessee. Further, in the fresh assessment, if any such disallowance is called for, that would invariably be restricted only to the extent of 15 per cent of the dividend income as upheld by the learned CIT(A) since the matter shall remain confined to that extent only. We order accordingly. 39. In the result, the appeal filed by the assessee is partly allowed in the m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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