TMI Blog2010 (7) TMI 794X X X X Extracts X X X X X X X X Extracts X X X X ..... deductions. The reference to the declaration of dividend in the context of section 115JB by the Finance Minister or by the Circulars are merely explanations to the kind of malaise that the section sought to address. For invoking this section, there is no pre-requisite condition that the company should have declared dividend to the shareholders. Long-term capital gain is to be included in the net profit prepared under the Companies Act and the same is not deductible from the net profit for the purpose of computing book profit u/s 115JB. We further hold that merely because the long-term capital gain is exempt u/s 47(iv) under the normal provision of the Act, it is not correct to say that it is also to be reduced from the net profit for the purpose of computing book profit u/s 115JB when the Explanation to section 115JB does not provide for any deduction in terms of section 47( iv ). In other words, we hold that section 47( iv ) of the Act has no application in the computation of book profit under section 115JB of the 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 51,98,44,133 3. As seen from the above, the CIT observed that the results of the assessee at Rs. 99,42,30,595 which was arrived after adding the extraordinary item of Rs. 1,16,11,32,013 is to be considered for arriving the book profit under section 115JB of the Act. The contention of the learned counsel for the assessee is that the above amount of extraordinary item of Rs. 1,16,11,32,013 consists of the following items which cannot be form part of the book profit : Extraordinary item of Rs. 1,16,11,32,013 includes the following debit/credit items : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of Parts II and III of Schedule VI to the Companies 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tally different. Section 115JB(5) provides that save as otherwise provided in 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 Veekayl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets yield only capital gains and they do not partake the character of business profits. Simply because these were shown as part of trading receipts in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermining book profits and thereby, deemed total income, they prevail over the other, regular provisions of this Act. Sub-sections (1) and (2) together make section 115JB a self-contained code 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, is derived from the Profit and Loss account prepared in accordance with Parts II and III of Schedule VI to the Companies Act. It is to be noted that, as per Explanation (1) , the basis for computing the book profit is the Profit 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied to net profit to arrive at the book profit . Such an interpretation would render the non obstante clause of section 115JB(1) ineffective and the section 115JB(2) super- fluous. For instance, Explanation (1) to section 115JB(2) provides for reduction of 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 exemp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of construction to read words into a statute which the Legislature in its wisdom has deliberately not incorporated. The plea of the assessee that the section 115JB is not applicable to its case due to absence of dividend is, therefore, devoid of merit. Hence, the order of Commissioner be upheld and the appeal of 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 cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Hon ble Supreme Court in the case of Apollo Tyres Ltd. ( supra ), where the accounts are prepared and certified by the auditors, which in turn are approved/adopted by the shareholders of the company and are filed before the Registrar of Companies, the Assessing Officer has no power of disturbing the profits of business. The only power 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as follows : (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2007, is less than ten per cent of its 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 Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or expenses in respect of non-recurring transaction or transactions of an exceptional nature. Further the company is also required to set out the various items relating to the income and expenditure of the company arranged under most convenient heads and disclosing profit or loss in respect of transaction of a kind not usually undertaken by the company or undertaking in circumstances of exceptional or non-recurring nature if 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 secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he profit and loss account, the assessee had contravened the sub-clause ( xi )( a ) of clause 3 of Part II of Schedule VI to the Companies Act and that he was, therefore, entitled to add the capital profit to the book profit. On appeal, the first appellate authority reversed the assessment order on the ground that the Assessing Officer had no jurisdiction to go beyond the net profit shown in the profit and loss account except to the extent provided in the 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 Apoll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the same was not includible in profit and loss account prepared under Part II and Part III of Schedule VI to the Companies Act. In the circumstances, when the assessee themselves have included the capital gains arising from sale of subsidiary in the P L, the same cannot be excluded under any of the Explanations under section 115JB. At this point, it is not necessary for us to dwell upon the situation, where the assessee has directly credited the profit on sale of asset 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is part of profit which cannot be excluded in the computation of book profit. Even though learned Senior Counsel for the assessee contended that the case decided by the Bombay High Court did not involve claim of exemption on capital gains under section 54E of the Act, we do not think this distinction makes any difference because so long as long-term capital gains is part of profit included in the profit and loss account prepared under Chapter VI of the Companies Act, it cannot be excluded unless so provided under Explanation to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithin the ambit of the expression show in the P L account occurring in Explanation to section 115J - Further, the net profit of a company cannot be determined till all the items of income and expenses as well as depreciation are taken into account - depreciation, even if not debited to the profit and loss account has to be taken into account while determining book profit under section 115J as long as it forms part of the prescribed accounts - That apart, section 205(1), proviso ( b ) of the Companies Act, read with clause ( iv ) of Explana-tion 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 Veekayl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned counsel for the assessee strongly contended that the provisions contained in sub-section (5) of section 115JB of the Act to contend that since all other provisions of this Act shall also apply to every assessee, being a company, mentioned in the section 115JB of the Act, the assessee is entitled to reduce the long-term capital gain exempted under section 47( iv ) of the Act. For this proposition the assessee relies on the decision of the Mumbai Tribunal in the case of Frigsales (India) Ltd. ( supra ). In that case, it is noted by the Tribunal in para 3.2 of its order that the capital 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit by increasing or reducing the net profit as shown in the profit and loss account prepared in accordance with the provisions of Part II and Part III of Schedule VI to the Companies Act are specifically provided in section 115J or 115JA or 115JB itself as the case may be, and consequently all other provisions of the Act providing the manner of computation of total income under normal provisions of the Act cannot be applied while computing book profit under section 115J or 115JA or 115JB, as the case may be. We do not find any difference between section 115J or 115JA or 115JB insofar as method of computation 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 reit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 section 115JB of the Act and, hence, no assistance from any other section of the Act can be taken for that purpose. The case law relied upon by learned Departmental Representative in the cases of Apollo Tyres Ltd. ( supra ) and HCL Comnet Systems Services Ltd. ( supra ) had clearly laid down a law that the Assessing Officer has only limited power of making increases and reductions to the net profit shown in the profit and loss account except as provided for in the Explanation to section 115J or 115JA 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 capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares of subsidiary, then the capital gains not taxed in view of section 47( iv )/47( v ) gets taxed under section 47A. Further when the transferee sells the asset, the cost of acquisition is taken as the cost of acquisition of the transferor. Thus, the capital gains in respect of the first transaction between the Holding Company and the Subsidiary, gets included in the capital gains arising from the sale of the asset by the transferee. There can be no such adjustments in computing book profits. Further the capital gains exempt under section 47( iv )/47( v ) is computed by taking cost of acquisition (and in some cases notional market value as on 1-4-1984) as indexed. But in the case of Book profits, the profits 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l as the analyses of various High Courts and Supreme Court decisions, the inescapable conclusion is that the book profits have to be calculated on the net profits computed as per Parts II and III of Schedule VI to the Companies Act, 1956 and as adjusted by the amounts mentioned in the Explanation . No further rebates or deductions after such adjustments, notwithstanding the fact whether any income is taxable or not under the normal provisions of the Income-tax Act. Computation of income under the normal provisions and the Book profits are two parallel computations. While normally followed method of accounting in the books may also be taken for the purpose of computing income under the Income-tax Act, the actual computation of 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 in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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