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TMI Blog2010 (7) TMI 794X X X X Extracts X X X X X X X X Extracts X X X X ..... e VI to the Companies Act, 1956 on account of gains arising out of the transfer of assets to wholly-owned subsidiary as part of book profit without considering the provisions of section 47(iv) of the 1961 Act?" 2. Brief facts of the case are that, the assessee is a company filed return of income for the assessment year 2004-05 declaring a loss of Rs. 45,81,56,760. The assessment was completed under section 143(3) of the Act determining the total loss at Rs. 36,27,98,173 after making an addition of Rs. 9,53,58,587 towards deferred revenue expenditure. As per profit and loss account, prepared in accordance with Parts II and III of Schedule VI to the Companies Act, the profit before tax was Rs. 99,42,30,515 and no income was offered under section 115JB of the Income-tax Act. As such, on examination of records, the CIT assumed his jurisdiction under section 263 of the Act for revision on the ground that the assessee is liable to pay income-tax on book profit as declared by the assessee in its profit and loss account as follows : (Rs.) Profit after taxation and extraordinary items 99,42,30,595 Balance brought forward from previous year 47,43,86,462 Book Profit 51,98,44,1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come as it is not regarded as transfer of assets under section 47(iv) of the Act since profit arising out of this transfer cannot be treated as income in terms of section 2(45) of the Act. According to the assessee, book profit is negative as shown below : Profit as per P&L account as on 31-3-2004 Rs. 99,42,30,595 Less: Capital Gains exempt under section 47(iv) which cannot be deemed as income on transfer of assets from 100 per cent Holding Company to 100 per cent of Subsidiary Company as the transfer cannot be considered as a Transfer under section 47 of the Income-tax Act, 1961 Rs. 1,49,77,46,577 Book Profit (Negative) (-) Rs. 50,35,15,982 4. According to the assessee's counsel, no adjustment against Book Losses/Depreciation of earlier years (Rs. 47,43,86,462) is required and, hence, there is no book profit. Not convinced with the explanations and submissions made by the assessee, the CIT assumed his jurisdiction under section 263 of the Act and held that assessment order passed by the Assessing Officer is erroneous and prejudicial to the interests of the revenue and directed the Assessing Officer to adopt the book profits of the assessee at Rs. 99,42,30,595 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies Act, 1956. Therefore, the profit realized from sale of assets did not form part of the book profit as required to be shown in the profit and loss account as an extraordinary item under the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. The Hon'ble Delhi ITAT in the case of Asstt. CIT v. Northern India Theatres (P.) Ltd. [1996] 56 ITD 42 (TM) has dealt with the question whether profit on sale of fixed assets should be shown as profit for the purpose of Parts II and III of Schedule VI, and has held that capital gain on sale of fixed assets do not partake the character of business profits and the same should not be shown as business profits in a properly prepared profit and loss account as per provisions of Parts II and III of Schedule VI to Companies Act. The Hon'ble ITAT has further held that if items of credit which do not relate to the business carried on by the company are found included in its profit and loss account, such a profit and loss account cannot be called as profit and loss account prepared in accordance with the requirements of Parts II and III of the Schedule VI. Hence, it is submitted that the profits derived on transfer of assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this section, all other provisions of the Act shall apply to every assessee, being a company, mentioned this section". The decision of Bombay High Court in the case of CIT v. Veekaylal Investment Co. (P.) Ltd. [2001] 249 ITR 597 is totally distinguishable as in that case, the ruling was given under section 115J whereas the section under question before the Special Bench is under section 115JB of the Act which is very much different from section 115J. In that case, the Court has not considered the section 2(24) which define the income and section 4 of the Act which is a charging section under the Income-tax Act. In view of the above, the learned counsel for the assessee concluded that the only income as commercially understood can be liable to tax under section 115JB and not the every credit to the profit and loss account. The Explanation to section 115JB which also refers to the exclusion of income which is not chargeable to tax under section 10 for calculating book profit. Thus, on the same line what is chargeable to tax is only to be part of the book profit. Hence, the decision of the Veekaylal Investment Co. (P.) Ltd.'s case (supra ), etc., relied by the department is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P&L account and accounts were audited, nature of receipt cannot change. 9.Oswal Agro Mills Ltd. v. Dy. CIT [1994] 51 ITD 447 (Delhi). Book profits should include only income from the business activities of the company and not any income which arose on account of capital gains. Accordingly, short-term capital gains as a result of sale of certain Government securities credited to profit and loss account not to be included for computation of book profit under MAT provisions. 10.GKW Ltd. v. Jt. CIT [2000] 74 ITD 161 (Cal.). The object of Legislature is to consider the profits of the business while computing the book profits of the company and profit on transfer of assets should not be considered while computing the same. 11.Hitkari Fibres Ltd. v. Jt. CIT [2004] 90 ITD 654 (Mum.). Waiver of interest written back in P&L account, provision of which was not allowed in earlier years, not to be included in MAT provisions. MAT to be levied on real book profits which has been earned by the companies and not on artificial income. 10. It is further submitted that capital gains in this case are exempt under section 47(iv) of the Act and this fact was not disputed by the department. Therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de and there is no difference in this respect from the earlier provisions of section 115JA and section 115J. 12. She relied on the decision of the Apex Court, in the case of Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 , for the proposition that the Assessing Officer cannot go beyond the Profit and Loss account except to the extent provided in Explanation 1. Even though the decision was rendered in the context of section 115J of the Act but there is no doubt that section 115J did not have any provision analogous to sub-section (5) of section 115JB of the Act. However, section 115JB(5) of the Act does not impact on the charging and computation aspects of section 115JB, contained in its sub-sections (1) and (2). This is clear from the decision of the Supreme Court in the case of CIT v. HCL Comnet Systems & Services Ltd. [2008] 305 ITR 409 , rendered in the context of section 115JA [whose sub-section (4) is analogous to sub-section (5) of section 115JB], where the views expressed in the case of Apollo Tyres Ltd. (supra) were extensively quoted, relied on and reiterated. From the above Apex Court decisions, the Court laid down the following principles with regard to section 115JB of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Loss account', so prepared, and not the 'net profit' as per the provisions of the Companies Act. Reference to the Companies Act is to be made only with regard to the Profit and Loss account and not for the definitions or determination of net profit. 'Book profit' is to be determined exclusively in accordance with Parts II and III of Schedule VI to the Companies Act. Though there are references in various sections of the Companies Act to the drawing up of the Profit and Loss account or the determination of net profits, for the purposes of the determination of 'book profits' under section 115JB, it is the manner and method provided in Parts II and III of Schedule VI to the Companies Act, alone that is relevant. The provisions of section 349 of the Companies Act, which specifies the manner in which 'net profits' of the company are to be determined cannot, therefore, be imported into section 115JB of the Act when it has not expressly been provided for. Para 2(b) of Part II of Schedule VI to Companies Act requires that 'The profit and loss account shall disclose every material feature, including credits or receipts and debits or expenses in respect of non-recurring transactions or t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f deductions under sections 80HHC, 80HHE and 80HHF from the book profits. If the assessee's arguments were to be accepted, the other deductions of Chapter VI should also be reduced from the book profit since their non-application is not 'otherwise provided'. Such an interpretation of section 115JB(5) cannot be said to be the intention of the Legislature. Certain incomes have been exempted from taxation under the Income-tax Act by various specific provisions. Section 47 is one such provision whereby certain transactions have been specifically exempted from the application of section 45 of the Act. Such an exemption does not change the nature of the transaction from intrinsically being in the nature of transfer or resulting in income. Indeed, section 47 further emphasizes that such transactions would have been in the nature of transfer and the resultant receipt would have been in the nature of income, but for the specific exemption provided by the section. No such exemption being available to the assessee under section 115JB, the question of claiming deduction of all 'exempted income' does not arise. 16. The learned Departmental Representative placed reliance on the following decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee be dismissed. She also relied on the decision in the case of Veekaylal Investment Co. (P.) Ltd. (supra), wherein it was held as follows : "Held, allowing the appeal, that according to section 115J of the Act, 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 deemed to be an amount equal to 30 per cent of such book profit and such income shall be chargeable to tax. The important thing to be noted is that while calculating the total income under the Income-tax Act, the assessee is required to take into account income by way of capital gains under section 45 of the Act. In the circumstances, while computing the book profits under the Companies Act, the assessee has to include capital gains for computing the book profits under section 115J. Even under clause 3(xii) of Part II of Schedule VI to the Companies Act, 1956, profits or losses in respect of transactions or transactions of an exceptional or non-recurring nature are to be disclosed. This shows clearly that capital gains should be included for the purposes of computing book profits." And the decision of the Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ower of Assessing Officer under section 115JB of the Act is to make suitable adjustments to the profits of the business under Explanation to this section. The net profit shown in the P&L account are to be adopted for working out the book profit of the company under section 115JB of the Act by the Assessing Officer except to the extent adjustments provided in the Explanation to the said section. 18. We have considered the rival submissions and perused the materials available on record and the case laws relied upon by both the parties. We have taken into consideration the ratio decidendi of all the decisions relied upon by the rival parties. The omission of reference to some of the cases in the order is either due to their irrelevance or to relieve the order from the repetitive nature of the decisions. Under Minimum Alternate Tax (MAT) provisions, the Assessing Officer is concerned with the adjustments to be made with the net profit as shown in the profit and loss account. One of the moot question relevance to the issue before us is whether the Assessing Officer has power to alter the net profit ? In our considered opinion, Yes. We agree that it is settled law that Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of ten per cent. ****** (2) Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956) : ****** Explanation (1).-For the purposes of this section, book profit means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by. . . ." 20. It is evident from above that, the moot question that needs to be decided is whether Parts II and III of Schedule VI to the Companies Act permits the exclusion of the capital gain from the profit and loss account or not ? In other words, can a profit and loss account drawn up without considering the capital gain said to be in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act or not ? 21. Part II and Part III of Schedule VI to the Companies Act read as under: "Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material in amount. 22. The issue whether capital gains had to be included in book profits arose before the Bombay High Court in the case of Veekaylal Investment Co. (P.) Ltd. (supra). In that case, the Court held that if for computing the total income under the normal provisions, the capital gain computed under section 45 of the Act has to be taken into account, it was not understood how in computing the book profits under section 115J of the Act, the assessee could exclude capital gain. The assessee is required to take into account income by way of capital gain under section 45 of the Act. In the circumstances, while computing the book profits under the Companies Act, the assessee has to include capital gain for computing the book profits under section 115J. Even under clause 3(xii) of Part II of Schedule VI to the Companies Act, 1956, profits or losses in respect of transactions or transactions of an exceptional or non-recurring nature are to be disclosed. This shows clearly that capital gain should be included for the purposes of computing book profits. In the case of Apollo Tyres Ltd. (supra), the Apex Court held that the words "in accordance with the provisions of Parts II a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Explanation to section 115JB of the Act. On appeal by the department, the Tribunal upheld the stand of the Assessing Officer on the ground that as the assessee had not routed the capital profits through profit and loss account and directly credited it to the Balance Sheet, its accounts were not prepared in the manner provided in Part II and Part III of Schedule VI to the Companies Act. It was held that the fact that the auditors had certified the accounts were not relevant. The Tribunal distinguished the decision in the case of Apollo Tyres Ltd. (supra) on the ground that as the assessee had bypassed the provisions of Schedule VI and directly credited the capital profit to the reserve account, decision in the case of Apollo Tyres Ltd. (supra) did not apply. In the case under consideration, the department is in better footing, as the assessee- company itself credited the capital gain to the profit and loss account. Moreover, there is no qualification by the auditors that the accounts of the company are not in accordance with accounting policies, standards to be followed as per ICAI guidelines. 24. It is undisputed fact that the long-term capital gain earned by the assessee is inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sset to a reserve account. The proviso to section 115JB prescribes that the accounting policies, accounting standards and the method and rates of depreciation adopted for preparing the Book Profits under section 115JB shall be the same as adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting. Therefore, whatever accounting policy adopted for the purpose of preparing the P&L laid before the company should be adopted for computing Book Profits under section 115JB. Capital gains on sale of shares were included in computing the profits presented before the shareholders and the same should also be included in computing Book Profits under section 115JB. The Kerala High Court in the case of N.J. Jose & Co. (P.) Ltd. (supra) has held that capital gains, even though exempt under the normal provisions of income-tax under section 54E cannot be excluded while computing Book Profits. They have observed : ". . . We are unable to accept the contention of the assessee, because the assessment under Chapter XII-B on Book Profits is a self-contained code. The scheme thereunder is to adopt the P&L a/c of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s so provided underExplanationto section 115J(1A) of the Act. In the absence of any provision for exclusion of assessee is not entitled to the exclusion claimed. In other words, section 54E has no application in the computation of book profit under section 115J." In the decision of the Bombay High Court in the case of CIT v. Akshay Textiles Trading & Agencies (P.) Ltd. [2008] 304 ITR 401, the question referred to the High Court and the decision of the High Court, as reported are as under : "C. Whether on the facts and the circumstances of the case and in law, the Hon'ble Income-tax Appellate Tribunal was correct in upholding the order of the Commissioner of Income-tax (Appeals) in holding that the capital gains of Rs. 19,74,489 are not to be taken into account while computing the profits liable to be taxed under section 115JA of the Income-tax Act, 1961 and that the decision of the Hon'ble Bombay High Court in CIT v. Veekaylal Investment Co. (P.) Ltd. 249 ITR 597 was not applicable ? Insofar as question No. "C", our attention is invited to the judgment of the Supreme Court in Apollo Tyres Ltd. v. CIT 255 ITR 273 . The question framed therein which is similar to question No. "C" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to section 115J permits reduction of net profit to the extent of past losses or unabsorbed depreciation, whichever is less - If unabsorbed depreciation can be reduced from the net profit to arrive at book profit, there is no reason why current year's depreciation which is not charged to the profit and loss account cannot be deducted from the net profit in determining book profit. Regarding the judgment of Special Bench of the Tribunal rendered in the case of Sutlej Cotton Mills Ltd. (supra), we find that this judgment is not applicable in the present case because it was held by Hon'ble Bombay High Court in the case of Veekaylal Investment Co. (P.) Ltd. (supra) that capital gain is to be included in the book profit. In that case of Veekaylal Investment Co. (P.) Ltd. (supra), the Tribunal has decided this issues in favour of the assessee by following the judgment of Special Bench of the Tribunal rendered in the case of Sutlej Cotton Mills Ltd. (supra), but that decision of the Tribunal has been reversed by Hon'ble Bombay High Court, and, hence, this decision of the Special Bench of the Tribunal rendered in the case of Sutlej Cotton Mills Ltd. (supra) is of no avail to the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gain earned by the assessee being exempt under section 50 of the Act will not form part of the normal taxable income, and when the receipt is not in the nature of taxable income, it cannot be taxed as income under section 115JA of the Act. The Tribunal applied the provisions of sub-section (4) of section 115JA, which provides that "save as otherwise provided in this section (section 115JA), all other provisions of the Act shall apply", in taking a view that all other provisions of the Act would continue to operate and, therefore, the exempt income under section 50 would remain exempted as per the provisions of sub-section (4) of section 115JA. The Tribunal further observed that in section 115JA, a new sub-section (4) has been brought on the statute, which was not there in section 115J, and sub-section (4) has been introduced first time in section 115JA. The Tribunal, therefore, had taken a view that the operation of non obstante clause is now limited only to determine book profit and the book profits so determined have to be taxed taking into consideration the other provisions of the Act. In other words, the Tribunal hold that section 115JA is a part of the Act now and the exemptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of book profit as provided in Explanation appended thereto are concerned. The Tribunal in the case of Frigsales (India) Ltd. (supra) has not applied the ratio of decision of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. (supra) and Hon'ble Mumbai High Court in the case of Veekaylal Investment Co. (P.) Ltd. (supra) for the reason that these decisions were rendered in the context of provisions of section 115J of the Act, but the fact remains that the propositions laid down by Hon'ble Supreme Court in the case of Apollo Tyres Ltd. (supra) have been reiterated and relied upon by the Hon'ble Supreme Court in the case of HCL Comnet Systems & Services Ltd. (supra) which has been rendered in the context of section 115JA of the Act. As per sub-section (5) of section 115JB of the Act, which reads as "save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section". Having regard to expression "save as otherwise provided in this section" used in this sub-section (5) of section 115JB of the Act, we are of the considered opinion that the expression "save as otherwise provided in this section 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A of the Act. In the light of the discussions made above, it is clear that the Assessing Officer, while computing the book profit of a company under section 115JB of the Act, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having being properly maintained in accordance with the Companies Act, and the Assessing Officer thereafter has the limited power of making increases and reductions as provided for in the Explanation to section 115J of the Act. The capital gain in question is exempt under section 47(iv) of the Act but the same is not covered by any of the clauses (i) to (vii) of Explanation (1) to section 115JB of the Act. 28. The learned counsel for the assessee did not brought any authority on record for holding that the exempted capital gain is to be reduced from the net profit shown in the profit and loss account prepared under the Companies Act for the purpose of computing book profit under section 115JB of the Act. If such reduction of capital gain, which is exempted under section 47(iv) of the Act, is allowed from the net profit determined in the profit and loss account for the purpose of computing " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofits are the simple difference between the sale price and cost of acquisition. Hence, the capital gains excluded under the income-tax and that as per books are different. Similarly under section 50, it cannot be said that profit on sale of assets is totally exempted from taxation. The sale price of a depreciable asset is credited the Block of Assets having the same rate of depreciation. If the Block of Assets contains only the asset sold then the difference between the sale consideration and the WDV is assessed as short-term capital gains. If the Block of assets include assets not sold then the sale consideration reduces the WDV of those assets also, resulting in a lower depreciation and higher profits. Thus, taxation of the profits deferred and exempted. Further the rate of depreciation and consequently the WDV of the asset sold will be different under the Income-tax Act from that in the books. Then the profits on sale of assets as per books will not be the same as capital gains computed under section 50. We, therefore, do not find any force in the argument profits exempt under section 50 should be excluded in computing the Book Profits. Further, whenever, the Legislature wanted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Book profits will not affect or be governed by the computation of income under the normal provisions of the Income-tax Act. In fact only because the Government felt that companies availing of various deductions permitted under the Income-tax Act showed a low income for the purpose of income-tax but was able to show healthy profits as per books on the basis of which dividends were distributed and to tax these types of companies that tax on book profits were introduced. By again importing deductions allowed under the normal provisions of income-tax into computation of book profits, we will be negating the very purpose for which these sections were introduced. To sum up, we hold that in the absence of any provision for exclusion of capital gains exempted in the computation of book profit under the provisions contained in Explanation to section 115JB of the Act, the assessee is not entitled to the exclusion thereof as claimed. 30. We, therefore, answer the question referred to us against the assessee and hold that in the absence of any provision for exclusion of exempted capital gain in the computation of book profit under the provisions contained in Explanation to section 115JB of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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