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2015 (12) TMI 1419 - KARNATAKA HIGH COURT

2015 (12) TMI 1419 - KARNATAKA HIGH COURT - TMI - Income from capital gain - whether should be included for the purpose of computing Book Profit under Section 115JB? - Held that:- The proviso to the said Section 211(3)(C) of the Companies Act makes it clear that the standards of accounting specified by the Institute of Chartered Accountants of India shall be deemed to be the accounting standards until the accounting standards are prescribed by the Central Government under the subsection 3(C). .....

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AT.

However, this exercise of the assessing authorities, in recomputing the book profit of the assessee is contrary to the principles of law laid down by the Apex Court in Appollo Tyres (2002 (5) TMI 5 - SUPREME Court) wherein held that the only power vested with the Assessing Officer is to make increases and deductions as provided in the explanation to Section 115JB of the Act. Assessing Officer has no power to embark upon a fresh enquiry in regard to the entries made in the books o .....

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atisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. - Decided in favour of assessee. - I.T.A. No. 53/2009 - Dated:- 16-12-2015 - Vineet Saran And S. Sujatha, JJ. For the Appellant : Sri A Shankar, Adv and M Lava, Adv For the Respondent : Sri Jeevan J Neeralgi, Adv JUDGMENT This appeal is directed against the order of the Income Tax Appellate Tribunal, Bangalore Bench "A" relating to the assessment year 2003-04. 2. The appea .....

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land measuring 2 acres 32 guntas at Mahadevapura through public auction from the appropriate authority of the Income Tax Department for ₹ 26,60,000/-. The appellant borrowed unsecured loan of ₹ 24.00 lakhs from its directors for meeting the purchase consideration of the land. As the Appellant/company could not commence the hotel project in the said land, it was decided to sell the land and the same was sold for ₹ 1,22,50,000/- on 23.01.2003. In the books of accounts of the appe .....

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hown in the profit and loss account should be increased by the amount of capital gain of ₹ 51,71,820/-. The assessee objected to the inclusion of capital gain to the book profit. However, the Assessing Officer confirmed that the capital gain has to be shown in the profit and loss account, it cannot be straight away credited to the capital reserve. 4. On appeal before the Commissioner of Income Tax, the appellate authority, following the judgment of the Bombay High Court in the case of COMM .....

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by the authorities following the judgment of the Bombay High Court in Veekaylal s case (supra) and held that capital gains should be included for the purpose of computing book profit. This order passed by the ITAT is challenged in the present appeal. 5. Learned counsel Sri.S P Bhat appearing along with Sri C Basavaiah for the appellant submitted that the authorities under the Income Tax Act,1961 (hereinafter referred to as the Act for brevity) exceeded the jurisdiction in rescrutinising book pr .....

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ld contend that the purpose of Parts II and III of Schedule VI of the Companies Act would be only for a limited purpose of empowering the assessing authority to rely upon the authentic statements of the account of the company. The company is obligated to maintain its accounts in the manner provided by the Companies Act, the same to be scrutinized and certified by the statutory auditors and will have to be approved by the Company in its general meeting and thereafter to be filed before the Regist .....

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panies Act were followed. The only objection raised by the Income Tax Authorities was that capital gains cannot be directly taken into the account of the capital reserve, first, it has to be included in the profit and loss account for the purpose of computing book profit under Section 115JB of the Act. The Act provides that income prepared in accordance with the Companies Act shall be deemed income for the purpose of Section 115JB of the Act. The Assessing Officer while computing the income unde .....

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liance on the Judgment of the Apex Court in the case of C.I.T. Vs. HCL COMNET SYSTEMS AND SERVICES LIMITED reported in 2008 [305] ITR 409 and the Judgment of the Calcutta High Court in the case of COMMISSIONER OF INCOME TAX. WEST BENGAL VS N. GUIN & COMPANY PVT LTD reported in 116 ITR 475. 8. On the other hand, Sri. E.R. Indra Kumar, learned Senior Counsel assisted by Sri. E.I. Sanmathi appearing for the Revenue contended that the assessee has not followed standard accounting system in maint .....

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under Schedule VI of the Companies Act, having not been followed, the Income Tax Authorities are justified in rescrutinizing the book profit as per Sub-section (2) of Section 115JB of the Act. It is further contended that the Judgment of Veekaylal (supra) is squarely applicable to the facts of the case, as such the authorities are justified in following the said Judgment, that the capital gains should be included in the profit and loss account for the purpose of computing book profit. 9. It is .....

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loss account prepared under Sub-section [2] of Section 115JB in the case of amounts carried to any reserves, by whatever name called, as specified in clause [b] of the said explanation. The learned senior counsel has filed a memo placing on record the copy of Directors Report to the Members and the Auditor s Report and placed reliance on these reports to substantiate his contention that Clause[d] of the Auditor s report specifies that the profit and loss account and balance sheet referred to in .....

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atutory accounts as per the Companies Act, the Income Tax Authorities have every right to rescrutinize the net profit as per the book profit. The Judgment passed by the Tribunal confirming the orders of the Authorities is in accordance with the provisions of the Act and the same cannot be faulted with. As such, he seeks for dismissal of the appeal answering the question of law in favour of the Revenue. 10. Heard the learned Counsel appearing for the parties and perused the record. 11. Section 11 .....

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s than 7½% of the book profit, then the assessee has to prepare profit and loss account for the previous year, then fictionally, it will be deemed that its total income chargeable to tax would be an amount equal to 7½% of such book profit. The Income Tax Officer has computed the book profit and the regular income. As tax on regular income is more than tax on book profit, tax on regular income is adopted. The Authorities have consistently relied upon Clause 3 (XII[b]) of Part-II of .....

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he opinion, the Assessing Officer while computing the income under section 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the Assessing Officer does not have the jurisdiction to go b .....

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n to be made under section 115JA of the Act. For the purpose of section 115JA, the Assessing Officer can increase the net profit determined as per the profit and loss account prepared as per Parts II and III of Schedule VI to the Companies Act only to the extent permissible under the explanation thereto. 13. The explanation appended to Section 115JB provides certain Items which if debited to the profit and loss account can be added back to the net profit for computing the book profit. Clause (b) .....

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t the profit and loss account and balance sheet referred to in the report comply substantially in all material respects with the applicable accounting standards referred to in Section 211(3C) of the Companies Act except the land and building sold during the year, the capital gain has been transferred directly to capital reserve account instead of crediting to profit and loss account, which in the opinion of the directors is more appropriate. However, it is not disputed that this auditor s report .....

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e disclosed in the profit and loss account. Considering, the capital gain income falling under these clauses, it is incumbent on the Company to disclose the said amount of capital gain in the profit and loss account. Section 211 of the Companies Act contemplates, form and contents of balance sheet and profit and loss account. Sub-sections 3(A),3(B) and 3(C) of Section 211 provides that every profit and loss account and balance sheet of the company shall comply with the accounting standards, wher .....

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of accounting recommended by the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 (38 of 1949) as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards established under sub-section (1) of Section 210(A). 16. The proviso to the said Section 211(3)(C) of the Companies Act makes it clear that the standards of accounting specified by the Institute of Chartered Accountants of India sha .....

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