ITAT, DELHI BENCH ‘I’:Scope for exclusion of capital gains in computation of book profit under section 115JB of IT Act, 1961

Scope for exclusion of capital gains in computation of book profit under section 115JB of IT Act, 1961



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 u/s115JB; 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 u/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 u/s 115JB when the Explanation to section 115JB does not provide for any deduction in terms of section 54EC meaning thereby that section 54EC has no application in the computation of book profit u/s 115JB.



ITAT, DELHI BENCH ‘I’: NEW DELHI

Growth Avenue Securities Pvt. Ltd.

v.

DCIT

ITA No. 3912/Del/2005

May 22, 2009

RELEVANT EXTRACTS:



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16. In the present case, it is not in dispute that the long term capital gain earned by the assessee is included in the net profit determined as per P&L account prepared as per Part II and Part III of Schedule VI to the Companies Act. In other words, it is not the case of die assessee that the capital gain earned by the assessee was not included in the net profit determined as per P&L account of the assessee prepared under the Companies Act. We have perused the audited accounts of the assessee and finds that the auditors in their audit report has stated, amongst others, that, in their opinion, the profit and loss account and the balance sheet are in compliance with the accounting standards referred to in sub-section (3C) of section 211 of the Companies Act, and in their opinion and to the best of their information and according to explanations given to them, the balance sheet and profit and loss account read together with the notes thereon, give the information required by the Companies Act, 1956 in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India. In the audited profit and loss account, the assessee has included capital gain (long term) and capital gain (short term) amounting to Rs. 40,57,545/- and Rs. 1,49,422/- respectively. In the notes thereto, it is no-where mentioned and claimed that though the long term capital gain is included in the profit and loss account but it is not includible in the net profit in terms of provisions of Part II and Part III of Schedule VI to the Companies Act or the accounting principles accepted under the Companies Act. It is, thus, not a case of the assessee made out in the audited accounts that the long term capital gain was not includible in the profit and loss account prepared in terms of Schedule VI to the Companies Act. In the computation of book profit under section 115JB, the assessee claimed exclusion of long term capital gain amounting to Rs. 40,57,545/- u/s 54EC of the Act as the assessee deposited an amount of Rs. 41,00,000/- in specified schemes contemplated u/s 54EC of the Act. The assessee, thus, claimed deduction of long term capital gain from book profit by virtue of investment in specified schemes contemplated u/s 54EC of the Act and not because of the reason 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. 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 Part II and III of Schedule 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 Income Tax Act, and has nothing to do with the preparation of profit and loss account in accordance with the provisions of Part II and ill of Schedule VI to the Companies Act. In these circumstances, so long as long term capital gain is part of profit included in the profit and loss account prepared in accordance with the provisions contained in Part II and III of Schedule VI to the Companies Act, it cannot be excluded from the net profit unless so provided under Explanation to section 115JB of the Act for the purpose of computing book profit under section 115JB of the Act. In the absence of any provision for exclusion of capital gains in the computation of book profit under the above provision, the assessee is not entitled to the exclusion claimed. In other words, section 54EC has no application in the computation of book profit under section 115JB of the Act.

17. The assessee's further case is that since the capital gain arising from the transfer of a long term capital asset was invested in the specified schemes within die specified time as contemplated u/s 54EC of the Act, the capital gain arising to the assessee shall not be charged to tax as so provided in section 54EC of the Act, and as such the same is to reduced from the net profit determined in the P&L account prepared by the assessee while computing "Book-profit" within the meaning of section 115JB of the Act. The Id. Counsel for the assessee has laid down a great deal of emphasis upon the provisions contained in sub section (5) of section 115 JB to contend that since all other provisions of this Act shall also apply to every assessee, being a company, mentioned in the section 115 JB of the Act, the assessee is entitled to reduce the long term capital gain exempted u/s54ECoftheAct.

18. We, therefore, find it necessary to look into 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 115 JB, we are of the view that the expression "save as otherwise provided in this section 115 JB" clearly means that what is provided in section 115JB should be religiously followed and anything over and above the matter provided in section 115JB will be subject to other provisions of the Act. The provisions of section 115JB has an overriding effect upon other provisions of the Act as is evident from the section itself. The method of computation of book profit provided in Explanation to section 115JB, should, thus, be followed while computing the book profit, and the normal provisions of computation of profit under any head of the Act shall not be applicable. By no stretch of imagination can it be construed as substituting die other provisions of the Act in place of what is specifically made available in section 115 JB in so far as the computation of book profit u/s 115JB is concerned. The entire mechanism for the computation of book profit is clearly set out in sub section (1) of section 115 JB read with Explanation thereto. Not only starring point being the net profit as shown in the profit and loss account prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act but also the items, which are to be increased as stipulated in clauses (a) to (h), and the items, which are to be reduced as specified in clauses (i) to (vii), find separate mentioned 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 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 (supra) and CIT vs. HCL Comnet Systems and Services Ltd. (supra) has clearly laid down a law that the A.O. has the limited power of making increases and reductions to tfie net profit shown in the profit and loss account except as provided for in the Explanation to section 115J or 115JA. In other words, the Hon'ble Supreme Court has clearly held that the A.O., while computing the book profits of a company under section 115 J or 115 JA of the Income-tax Act, 1961, 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 except as provided for in the Explanation to section 115Jor 115JAor 115JB, as the case may be.

19. In the light of the discussions made above, it is, thus, clear that the view that the A.O., while computing the book profit of a company u/s 115J or 115JA or 115JB of the Act, as the case may be, 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 A.O. thereafter has the limited power of making increases and reductions as provided for in the Explanation to section 115J is settled by a decision of Hon'ble Supreme Court in the above referred cases.

20. When a deduction of capital gain available u/s 54EC is not covered by any of a clauses (i) to (vii) of Explanation (1) to section 115JB there is no authority for falling upon the command of section 54EC for holding that the capital gain deductible under section 54EC is also 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 u/s 115 JB of the Act- If such reduction of capital gain, which is eligible for deduction u/s 54EC of the Act, is allowed to be made form the net profit determined in the profit and loss account prepared by the assessee in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act and laid before the company in its annual general meeting, for the purpose of computing "Book-profit" under section 115JB, it would certainly be against the above referred decisions laid down by the Hon'ble Supreme Court in the case of Apollo Tyres vs. CIT (supra) and CIT vs. HCL Comnet Systems & Services Ltd. (supra) wherein the powers of the A.O. while computing the book profits for the purpose of section 115 J or 115 J A were examines and analyzed.

25. It is undisputed fact that the receipt of capital gain has been included in the profit and loss account prepared by the assessee under the Companies Act, and it is now the claim of the assessee that capital gain being exempted u/s 54EC of die Act should not be included in the book profit computed u/s 115JB of the Act. In this regard, we find that the judgement of Hon'ble Mumbai High Court in the case of Veekay Lai Investment Co. Pvt. Ltd. reported in 249 ITR 597 (Mum.), which was relied upon by the department in the case of ITO vs. Frigsales Ltd. (supra), is relevant and has important bearing to the controversy arising in the present case. In that case, the assessee filed its return of income declaring a net loss of Rs.29,120/-. In that case, part of land was sold by the assessee and in the return of income, the assessee treated the income derived from the above sale of property as long term capital gain and offered Rs.2.70 lakhs for taxation but as per the P&L A/c for this year, the assessee earned a net profit of Rs. 12,76,119/- but the assessee did not offer any income under section 115 J of the Act on the ground that under section 115 J, one has to take commercial profit and if any receipt has no commercial profit element, then such receipt would have to be excluded for the purposes of section 115 J. It was also the claim of the assessee that commercial profits or profits under section 115J cannot include capital gains. In that case, the Assessing Officer rejected this claim of the assessee. Ld CIT(A) also confirmed the assessment order but the Tribunal took the view that under the Income Tax Act, 1961, capital gain is deemed to be income under section 45. It is also held that the said section applies only to the limited extent and what is deemed to be income under section 45 is not an income for book profit and on this basis, the Tribunal decided tins 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. (supra) 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 section 115J of the Act. The findings of Hon'ble Bombay High Court are reproduced below:

"We find merit in this appeal. According to section 115(1), in the case of an assessee being a company if the total income is less than 30% of its book profits then the total income of such company shall be deemed to be an amount equal to 30% of such book profit and such income shall be chargeable to tax. That, the assessee has to first compute the total income in accordance with the Income Tax Act, 1961 and if the total income is less than 30% of the book prof it then the assessee has to prepare a profit and loss account for the previous year in accordance with parts II and III of Schedule VI of the Companies Act. In other words, a plain reading of section 115J shows that if the assessee is a company and its total income under the Income Tax Act, 1961 is less than 30% of its book profits then, fictionally, it will be deemed that its total income chargeable to tax would be an amount equal to 30% of such book profits. Hence, in such a case, the total income of the assessee is first required to be computed under the Income Tax Act, 1961 and if the total income so computed is less than 30% of the book profits then the profit and loss account shall have to be prepared in accordance with Part-II and Part-Ill of Schedule-VI of the Companies Act. The important thing to be noted is that while calculating the total income under the Income Tax Act, 1961, the assessee is required to take into account income by way of capital gains under section 45 of the Income Tax Act, 1961. In the circumstances, one fails to understand as to how in computing the book profits under the Companies Act. The assessee company cannot consider capital gains for the purposes of computing book profits under section 115J of the Act. Further, under clause 2 of Part II of Schedule VI to the Companies Act where a company receives the amount on account of surrender of lease hold rights, the company is bound to disclose in the profit and loss account the said amount as non recurring transaction or a transaction of an exceptional nature irrespective of its nature, i.e. whether capital or revenue. That, it would be inappropriate to directly transfer such amount to capital reserve (see Companies Act by A. Ramaiya, page 1669, Fourteenth Edition. Such receipts are also covered by clause 2(b) of Part II of Schedule VI to the Companies Act which, inter alia states 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 transactions of an exception nature. Lastly, even under clause 3(xli)(b) profits or losses in respect of transactions not usually undertaken by the company or undertaken in circumstances of exceptional or non recurring nature shows clearly that capital 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 clause 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 (see page 165) of the Companies Act by A. Samaiya, fourteenth edition). Similarly, profits or losses on such investments are also required to be disclosed (see clause 3(xii)(b) of Part-II of Schedule 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 assesses. "

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 Id. 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 u/s 115 JBJ 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 u/s 54ECS it is not correct to say that it is also to be reduced from the net profit for the purpose of computing deduction u/s 115JB when the Explanation to section 115JB does not provide for any deduction in terms of section 54EC)of the Act. In other words, we hold/that section 54EC has no application in the computation of book profit u/s 115JB)of the Act. To sum up, we hold that in the absence of any provision for exclusion of capital gains exempted u/s 54EC in the computation of book profit under the provisions contained in Explanation to section 115JB, the assessee is not entitled to the exclusion thereof as claimed. The order of Id. CIT (A) is, thus, upheld, and tins ground raised by the assessee is rejected.

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