IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH ... · Per AKBER BASHA, ACCOUNTANT MEMBER The...

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH, SPECIAL BENCH ‘B’, HYDERABAD

BEFORE S/SHRI G.C. GUPTA, V.P, SMT. ASHA VIJAYARAGHAVAN, JM AND AKBER BASHA, A.M

I.T.A. No.673/Hyd/2009 Assessment Year: 2004-05

Rain Commodities Limited,

Plot No.34, Rain Centre, Srinagar Colony, .. Appellant Hyderabad. PAN : AABCP2276K

Versus

Dy. Commissioner of Income, .. Respondent

Cir- 3(1), Hyderabad.

Assessee By : Shri. Rajan Vora, Advocate

Respondent By : Vasundhara Sinha, DR

ORDER

Per AKBER BASHA, ACCOUNTANT MEMBER

The assessee is in appeal before us against the order of the

learned Commissioner under Section 263 of the Income Tax Act, 1961 (the

Act) dated 23-03-2009 for assessment year 2004-05. On a reference made by

the Division Bench to the Honourable President, Income Tax Appellate

Tribunal, the Honourable President vide order dated 27th October 2009,

constituted the present Special Bench to adjudicate the following question of

law:

ITA No.673/Hyd/09 M/s.Rain Commodities Limited, Hyderabad.

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"Whether in the facts and circumstances of the case, the CIT was justified in invoking the provisions of S.263 and directing the assessing officer to re-compute the book profit

under S.115JB of the Act 1961 by considering the profit and loss account prepared in accordance with Part II & III of Schedule VI

of 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 S.47[iv] of the Act

1961"

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 S.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 Part II & III of Schedule VI to the Companies Act,

the profit before tax was 99,42,30,515/- and no income was offered under

S.115JB of the IT Act. As such, on examination of records, the CIT assumed

his jurisdiction under S.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:

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.116,11,32,013 is to be considered for arriving the book profit under

S.115JB of the Act. The contention of the learned counsel for the assessee is

that the above amount of extraordinary item of Rs.116,11,32,013 consists of

the following items which cannot be form part of the book profit.


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“Extraordinary item of Rs.1,16,11,32,013 includes the following debit/credit

items.

(Rs.)

1. Write off (Bad debts/other advances paid which cannot be recovered) 33,47,64,019 (Dr)

2. Write Back (creditors/advances Received not considered for payment) (4,16,67,423 (Cr)

3. Profit on Transfer of Assets of Rain Commodities Ltd (100% Holding Company)to Rain Industries Ltd

(100% subsidiary company)which is exempt u/s 47(iv) of the IT Act. (149,77,46,577) Dr

4. Loss on sale of other assets 4,35,17,968 ( Dr) ------------------------- 116,11,32,013

--------------------------

Further, it was also submitted by the assessee that Rain Commodities Ltd., is a

100% holding Company and Rain Industries Ltd. is a 100% subsidiary

company and as per the scheme of arrangement between Priyadarshini

Cements Ltd. (presently known as Rain Commodities Ltd.,) and Rain Industries

Ltd., which was approved by the Hon’ble AP High Court, the Assets and

Liabilities of M/s Priyadarshini Cements Ltd were transferred to the Rain

Industries and the capital gain arising out of this transaction is exempted

under S. 47(iv) of the Act from income tax. The transfer of assets from

holding company to subsidiary company is not regarded as transfer under S.

47(iv) of the Act and it does not constitute the part of total income in terms of

S.2 (45) of the Act. It is also submitted that even though assets are

transferred from 100% holding company to 100% subsidiary company, the

transfer is not regarded as a transfer under S. 47(iv) of the IT Act. When

there is no transfer under S. 47(iv), there is no question of deeming the capital

gain as income of the assessee. As such, the profit on transfer of assets of

Rain Commodities Ltd., to Rain Industries Ltd at Rs.149,77,46,377 cannot be

treated as business income as it is not regarded as transfer of assets under S.

47 (iv) of the Act since profit arising out of this transfer cannot be treated as


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income in terms of S. 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.9,94,230,595

Less: Capital Gains exempt u/s 47(iv) which cannot be

Deemed as income on transfer of assets from 100% Holding Company to 100% of Subsidiary Company

as the transfer cannot be Considered as a Transfer u/s 47 of

the Income Tax Act, 1961 Rs.149,77,46,577

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/- shown in the profit and loss account under S.115JB of the

Act with a further direction to allow eligible loss brought forward or unabsorbed

depreciation whichever is less as per books of account. Aggrieved by the order

of the Commissioner, the assessee is in appeal before us. At the time of

hearing, none of the parties before us advanced any serious objection about

the validity of the assumption of jurisdiction by the learned Commissioner

under S.263 of the Act. Accordingly, we confine ourselves to adjudicate the

question referred to us on merits.

5. The learned counsel for the assessee submitted that the intention

of the section 115JB under the Act is to tax only the 'profits' of the company

and not to tax the profits other than the normal business profits generated

while carrying on the business activities. The assessee's counsel placed


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reliance on the decision of the Calcutta Special Bench of ITAT in the case of

Sutlej Cotton Mills Ltd vs. ACIT reported in 45 ITD 22, where in the intent of

the legislature from the inception of section 80VVA till the amendments made

in this regard to date to section 115J are considered. The purposive

construction of section 115J is considered. The purposive construction of

section 115J was observed and concluded that the book profits are only those

which are assessable as income under the Act. In the interpretation of

statutes, one has to adopt a construction as will promote the general

legislative purpose underlying the provision. After examining the

Memorandum to the Finance Speech explaining the provision, it was concluded

that the expression "book profit" was intended to be confined to business profit

and was not intended to include profit on realization of any asset. The genesis

of section 115J, thereafter section 115JA and now section 115JB was to ensure

that the assessee, while making profit from operations, should not enjoy tax

free status due to various deductions available. Therefore, there was never

any intention of the legislature to tax what is not profit from operations under

S. 115JA (115JB now) of the Act.

6. It is submitted that, S.115JB(2) specifically provides that 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.

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 ACIT vs.

Northern India Theatres (P) Ltd reported in 56 ITD 42 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 or 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 of Companies


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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 is profit realized on capital assets in its hands, and thus

could not be part of the profit and loss account in accordance with the

provision of Parts II and III of Schedule VI to the Companies Act, 1956.

7. It is also submitted that only the profits in the nature of income

commercially understood can be liable to tax under section 115JB and not

capital receipt which may be admittedly of commercial in nature like gift,

amalgamation reserve, capital reserve and revaluation reserve irrespective of

the treatment in the books of account. Therefore, merely on account of

accounting treatment given to the particular receipt, the nature of receipt

cannot be decided. Part-II of Schedule-VI of the Companies Act deals with the

requirement of profit and loss a/c whereas Part-III deals with interpretation.

The profit arising on sale of investment cannot be treated as revenue receipt

arising from the carrying on the business of the assessee company. The

intention of the legislature is to tax commercial profits u/s 115JB and not the

profit arising on sale of assets. The introduction of section 115JB is to tax the

dividend paying company but not paying any tax.

8. According to the standard accounting practices as well as under

the Income-tax Act the assessee has two options to choose manner in which

the said surplus amount is to be accounted. Either the same may be credited

to the profit & loss account or transfer to the general reserve accounts. As per

the definition of income under S. 2(24) of the Act, income includes any capital

gains chargeable under section 45 of the Act. Capital gains which are not

chargeable under section 45 shall not be treated as income under section

2(24) of the Income-tax Act and consequently as the charging section i.e.,

section 4 of the Income-tax Act fails and such gain shall not be chargeable to


7

tax under any other provisions of Income-tax Act. In this regard, he relied on

the decision of Supreme Court in the case of CIT vs. D.P. Sandhu Brothers

reported in 273 ITR 1. He submitted that the receipts which are not taxable

under the normal provisions of the Act cannot be treated as part of book profit

under section 115JB. It is also submitted that the provisions of section 115J

and the provisions of sections 115JA and 115JB are totally 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 in this section". The decision of Bombay High Court in the case of

CIT vs. Veekaylal Investment Company Pvt. Ltd. is totally distinguishable as in

that case the ruling was given under section 115J whereas the section under

question before the Special Bench is u/s 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 S. 115JB and not the every credit to the

profit and loss account. The explanation to the 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 decisions of the Veekaylal

(supra) etc., relied by the department are not applicable to the facts of the

instant case. It is therefore submitted that the order of the CIT u/s 263 of the

Act directing to treat the surplus arising from transfer of business as book

profit is not correct and same needs to be reversed. Otherwise, virtually it will

mean taxing capital receipt as income which is not the intention of the section

115JB of the Act.


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9. For this purpose, the learned counsel for the assessee relied on the

following judgments:

1. Cadell Weaving Mill Co. (P) Ltd. Vs. CIT (249 ITR 265) (Bom) approved

by SC (273 ITR 1) (SC). Income u/s 2 (24) (vi) shall include only

capital gains chargeable to tax u/s 45 and not all capital gains i.e.

capital gains not chargeable to tax u/s 45 falls outside the definition of

income u/s 2 (24).

2. ACIT Vs. Mukund Ltd. (ITA No.304/Mum/2004. Capital gains on sale to

100% subsidiary not chargeable to tax u/s 47 (iv) of the Act cannot be

subjected to tax under MAT provisions.

3. ITO V. Suraj Jewellery (I) Ltd. (2009) 21 SOT 79 (Mum). Capital gains

on sale to holding company not chargeable to tax u/s 47 (iv) of the Act

cannot be subjected to tax under MAT provisions.

4. ITO V. Frigsales (I) Ltd. 4 SOT 376 (Mum). Capital gains not

chargeable to tax under S.50 of the Act cannot be subjected to tax

under MAT Provisions.

5. Oriental Containers Ltd. Vs. JCIT 19 SOT 30 (Mum). Surplus on

revaluation of deferred sales tax liability is not of income nature and

accordingly, such item could not form part of book profit for MAT

provisions.

6. Pal Synthetics Ltd. V. JCIT (ITA No.1310/Mum/03). Subsidiary receipt

which is not a taxable income cannot be subject to book profit for Mat

provisions.

7. Sutlej Cotton Mills Ltd. Vs. ACIT 45 ITD 22 (Cal) (SB). Book profit was

intended to be confined to business profits and was not intended to

include profit on realization of any asset. Capital gains is deemed to be

income only for the purpose of S.45 and cannot be deemed to be

income for MAT provisions.

8. ACIT V Northern India Theatres (P) Ltd. 56 ITD 42 (Del) (TM). Profits

on sale of fixed assets yield only capital gains and they do not partake

the character of business profits. Simply because these were shown as


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part of trading receipts in P&L account and accounts were audited,

nature of receipt cannot change.

9. Oswal Agro Mills Ltd. Vs. DCIT (51 ITD 447) (Del). 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. JCIT 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. JCIT 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 S. 47(iv) of the Act and this fact was not disputed by the Department.

Therefore the capital gains are not in the nature of income and they cannot be

taxed as income under the provisions of 115JB of the Act. He submitted that

115JB is a self contained code and sub-section (5) into the Statute which was

not in S.115J, states that ‘save otherwise provided in this section, all other

provisions of the act shall apply to every assessee being a company’. Hence

he submitted that now the other provisions of the Act will continue to apply in

view of Sub Section (5) of 115JB of the Act. Therefore, the exempt income

under S.47(iv) of the Act would remain exempted as per the provisions of sub-

section (5) and the operation of non absentee clause is limited only to

determine the book profit and book profit so determined has to be taxed taking

into consideration the other provisions of the Act”.


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11. The learned Departmental Representative Smt. Vasundra Sinha,

submitted that the very term used to describe the scheme of taxation under

S.115JB of the Act is ‘Minimum Alternate Tax’, i.e., to be seen as an alternate

method of taxation. The provision was to be invoked only when the tax

payable by the company fell below a certain limit. In such circumstances, the

regular provisions ceased to operate and a new and alternate basis of taxation

was provided for. The intention of the section is to tax the book profit,

irrespective of its nature or component and without the privileges of deductions

and exemptions available under the regular provisions. In this alternate

method, what is subjected to tax is the book profit and not ‘income’. So, the

nature of receipt being subjected to tax may not be ‘income’ in the strict

accounting or legal sense but is still taxable so long as it is part of ‘book profit’.

It is further submitted that sub-section (1) of section 115JB begins with a non

obstante clause, “Notwithstanding anything contained in any other provisions

of this Act…”. This is also the charging sub-section while sub-section (2)

provides for the computation of income under this section. Together, they

provide for levy of income tax on ‘book profit’ and not on ‘total income’ as

defined in the rest of the Act. Therefore, in determining 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 sec.115JA and sec.115J.

12. She relied on the decision of the Apex Court, in the case of

Apollo Tyres Ltd v CIT reported in 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 S.115J of the Act but there is no doubt that S.115J did not have

any provision analogous to sub-section (5) of S.115JB of the Act. However,

S.115JB (5) of the Act does not impact on the charging and computation

aspects of S.115JB, contained in its sub-sections (1) and (2). This is clear from


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the decision of the Supreme Court in the case of HCL Comnet Systems and

Services Ltd reported in 305 ITR 409, rendered in the context of sec.115JA

(whose sub-section (4) is analogous to sub-section (5) of sec.115JB), where

the views expressed in the case of Apollo Tyres Ltd were extensively quoted,

relied on and reiterated. From the above Apex court decisions, the court laid

down the following principles with regard to S.115 JB of the Act.

i) The A.O. has to accept the authenticity of the accounts maintained in

accordance with the provisions of Parts II and III of Schedule VI of the Companies Act, which are certified by the auditors and laid

before the company at the annual general meeting. ii) The A.O. cannot go beyond the net profit shown in the P&L account

prepared in accordance with Parts II and III of Schedule VI of the

Companies Act, except for the adjustments permissible under the Explanation 1.

iii) The adjustments required to be made to the net profit as per section 349 of the Companies Act are quite different from the adjustments required to be made as per the Explanation 1.

13. It is further submitted that the capital gain in question has been

duly reflected in the Profit and Loss account as ‘Extraordinary Items’. Further,

Note 1 of the ‘Notes on accounts’ categorically states that ‘the financial

statements have been prepared on the basis of going concern, under the

historical cost convention on accrual basis, to comply in all material aspects

with applicable accounting principles in India, the Accounting Standards issued

by the Institute of Chartered Accountants of India and the relevant provisions

of the Companies Act, 1956’. There is no mention in any of the other ‘Notes on

accounts’ that the inclusion of the capital gain in question was not in keeping

with Parts II and III of the Schedule VI of the Companies Act or of the

accounting principles. Thus, it cannot be said on the basis of the audited

accounts of the assessee that the capital gain was not includible in the Profit

and Loss account prepared in accordance with Parts II and III of the Schedule

VI of the Companies Act. Since the capital gain is part of net profit as per the

Profit and loss account prepared in accordance with Schedule VI of the

Companies Act, it cannot be excluded from net profit for computing book profit


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unless specifically provided in the Explanation to S.115JB. There being no

reference to S.47 (iv) in the Explanation 1, the assessee is not entitled to any

such deduction from net profit. “Book profit” as defined in the Explanation, is

derived from the Profit and Loss account prepared in accordance with Parts II

and III of Schedule VI of 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 of 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 S.115JB, it is the manner and method

provided in Parts II and III of Schedule VI of the Companies Act, alone that is

relevant. The provisions of S.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 S.115JB of the Act when it has not expressly been

provided for. Para 2(b) of Part II of Schedule VI of 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 transactions of an exceptional nature.’ Such transactions are

also specifically required to be disclosed in the Profit and Loss account by Para

3(xii) of Part III of Schedule VI. It is, thus, clear that all such receipts are very

much required to be reflected in the Profit and Loss account and included in

the net profit. While Sec.115J (as also sec.115JA) referred only to the

Companies Act for the manner of preparation of the Profit and loss account,

Sec.115JB lays down stricter norms by specifying adherence to accounting

standards and accounting policies as well. Para 34 of AS-13 provides that ‘On

disposal of an investment, the difference between the carrying amount and net

disposal proceeds should be charged or credited to the profit and loss

statement.’ Thus, even as per the Accounting Standards, capital gain are


13

required to be included in the Profit and loss account and consequently in the

net profit.

14. She also placed reliance on the decision of the Bombay High

Court in the case of CIT vs. Veekaylal Investments Co.P. Ltd reported in 249

ITR 597, where the requirements of the Companies Act for reflection of capital

gain in the P&L account were examined and hence, the inclusion of capital

gains in its Profit and loss account by the assessee is, therefore, in accordance

with the provisions of Schedule VI of the Companies Act and Accounting

Standards.

15. The view that exempt income is not to be included in the ‘book

profits’ in view of the provisions of S.115JB(5), is not in consonance with the

decision of the Supreme Court in HCL Comnet where the matter had been

considered with reference to sec.115JA, which is analogous to sec.115JB.

S.115JB does not classify ‘book profits’ into ‘heads of income, leave alone

‘taxable’ and ‘exempt’ income. Provisions of the Income Tax Act relevant for

the computation of regular income are not relevant for the purpose of

computation of ‘book profits’. Indeed, if the argument that exempt income is to

be excluded from ‘book profits’, is to be taken to its logical end, then all the

provisions of the Income Tax Act ought to be applied to net profit to arrive at

the ‘book profit’. Such an interpretation would render the non-obstante clause

of S.115JB(1) ineffective and the S.115JB(2) superfluous. For instance,

Explanation (1) to the S.115JB(2) provides for reduction of deductions under

S. 80HHC, 80HHE and 80HHF from the book profits. If the assessee’s

argument 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 S.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. S.47 is one such

provision whereby certain transactions have been specifically exempted from

the application of S.45 of the Act. Such an exemption does not change the


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nature of the transaction from intrinsically being in the nature of transfer or

resulting in income. Indeed, S.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 S.115JB, the

question of claiming deduction of all ‘exempted income’ does not arise.

16. The learned Departmental Representative placed reliance on the

following decisions:

i. N.J. Jose and Co. (P) Ltd. v Asst.CIT [2010] 321 ITR 132

(Ker)

ii. Growth Avenue in ITA No.3912/Del/2005 dt 29.5.2009

In the case of N.J.Jose [(supra)], the Kerala High Court held that there was no

provision for exclusion of such income included in the Profit and loss account

and the fact that income was exempt under S. 54E was not relevant for tax on

book profits under S.115J of the Act. In the case of Growth Avenue Securities,

the ITAT has, while holding that capital gain exempt under S.54EC were to be

included in the book profits, also examined the decisions in Sutlej Cotton Mills

Ltd v ACIT reported in 45 ITD 22(Cal)(SB) and ITO v Frigsales (India) Ltd

reported in 4 SOT 376 and held them to be not in consonance with the

decisions in Apollo Tyres and HCL Comnet.

17. Declaration of dividend is not a pre-requisite for application of

S.115JB of the Act. The purpose of the section, as of its predecessors, sections

115J and 115JA, was to tax companies which were making profits and also

declaring dividend. However the reference to declaration of dividend, whether

in the Speech of the Finance Minister or in Circulars of the CBDT, was merely

by way of explaining the kind of malaise that the section sought to address.

There is no reference in the section itself that dividend being declared by the

company as a condition for invoking the section. The only condition prescribed


15

for invoking the section is that the income tax payable by the company is less

than a prescribed percentage of the book profit. The law is clear, categorical

and unambiguous on this issue. It has been held by the Supreme Court in

Commissioner of Income-tax vs. Tara Agencies reported in 292 ITR 444 that

the intention of the Legislature has to be gathered from the language used in

the statute, which means that attention should be paid to what has been said

as also to what has not been said. The Court also held that it is the bounden

duty and obligation of the court to interpret the statute as it is. It is contrary to

all rules 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 CIT Vs. VeeKaylal Investment Company Pvt. Ltd. 249 ITR 597

(Bombay), wherein it was held as follows:

“ Held, allowing the appeal, that according tosection115J 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 byway of capital gains u/s 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 u/s 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 Hon’ble Supreme Court in the case of Appollo Tyres Vs.

CIT 255 ITR 273 (SC), wherein it was held as follows:

“ The assessing officer while computing the book profits of a company

u/s 115J of the IT 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


16

reductions as provided for in the Explanation to S.115J. The does not have the jurisdiction to go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation. The use of words ‘in

accordance with the provisions of Part II and III of Schedule VI of the Companies Act’ in section 115J was made for the limited purpose of

empowering the assessing officer to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the assessing officer has to accept the authenticity of the accounts with

reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be

scrutinized and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the

accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub S. (1A) of S.115J does not empower the assessing

officer to embark upon a fresh enquiry in regard to the entries made in the books of accounts of the company.

He held accordingly, that while determining the ‘book profits’ under section 115J, the assessing officer could not recomputed the profits in the profit and

loss account by excluding provisions made for arrears of depreciation. Decision of Kerala High Court in Appollo Tyres Ltd. 273 ITR 706 reversed on this point.”

It was held by the Hon’ble Supreme Court in the case of Apollo Tyres supra,

where the accounts are prepared and certified by the auditors, which in turn

are approved /adopted by the share holders 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

S.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 S. 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


17

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 has the power to alternate the net

profit. In the following two cases, the assessing officer can rewrite the profit

and loss account i.e. to say that assessing officer should recalculate the net

profit and then follow the adjustments of MAT as usual: [1] If it is discovered

that profit and loss account is not drawn up in accordance with Part II and Part

III of Schedule VI of the Companies Act. However, the assessing officer cannot

disturb the Net Profit as shown by the assessee where there are no such

allegations, fraud or misrepresentation but only a difference of opinion as to

whether a particular amount should be properly shown in the profit and loss

account or in the Balance sheet [2] If accounting policies, accounting standards

not adopted for preparing such accounts and method, rate of depreciation

which have been incorrectly adopted for preparation of profit and loss account

laid before the Annual General Meeting. Except for the above two cases, the

assessing officer has no power to alter the net profit shown by the companies

for the purpose of computing the book profit. Thus it is clear that under MAT,

the assessing officer should take the net profit as computed by the assessee

and then makes the adjustments under S.115JB of the Act. It is common that

some companies follow an accounting Year under the Companies act, 1956

which is different from the Financial Year under Income tax Act, 1961. These

companies generally prepare two sets of accounts – one for Companies Act and

another for Income Tax Act. The reason being different accounting policies,

standards, depreciation methods and rates are adopted in two sets of Account

so that higher profit is reported to shareholders and lower profit for the Income

tax authorities. To curb the above practice only this recalculation of net profit

under MAT was incorporated so that there should be a consistency in

http://www.itatonline.org


18

accounting policies, standards, methods and rates of depreciation within the

knowledge of Income tax authorities.

19. S.115JB reads 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 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:

Part II: Requirements as to Profit and Loss Account



19

The provisions of this part shall apply to the income and expenditure account

referred to in sub-section [2] of section 210 of the Companies Act, in like

manner as they apply to a profit and loss account, but subject to the

modification of references as specified in that sub-section. The profit and loss

account [a] shall be so made out as clearly to disclose the result of the working

of the company during the period covered by the account; and [b] shall

disclose every material feature, including credits or receipts and debits or

expenses in respect of non-recurring transaction or transactions of an

exceptional nature. The profit and loss account shall set out the various items

relating to the income and expenditure of the company arranged under the

most convenient heads and in particular, shall disclose the following

information in respect of the period covered by the account:

[i] ……………….

[ii]……………….

[xi] [a] The amount of income from investments, distinguishing between trade

investments and other investments.

[b] Other income by way of interest, specifying the nature of the income.

[c] The amount of income-tax deducted if the gross income is stated under

sub-paragraphs [a] and [b] above.

[xii] [a] Profits or losses on investments showing distinctly the extent of the

profits or losses earned or incurred on account of membership of a partnership

firm to the extent not adjusted from any previous provision or reserve.

Information in respect of this item should also be given in the balance sheet

under the relevant provision or reserve account.

[b] Profits or losses in respect of transactions of a kind, not usually undertaken

by the company or undertaken in circumstances of an exceptional or non-

recurring nature, if material in amount. As is evident from the above, the profit

and loss account of a company has to disclose every material feature including

credits or receipts and debits or expenses in respect of non-recurring

transaction or transactions of an exceptional nature. Further the company is



20

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

[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 S. 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 S. 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 [supra] the

Apex Court held that the words “in accordance with the provisions of Parts II

and III of Schedule VI to the Companies Act” were made for the purpose of

empowering the assessing authority to rely upon the authentic statements of

accounts of the company. It was held that while doing so, looking into the

accounts of the company, the assessing officer has to accept the authenticity

of the accounts with reference to the provisions of the Companies Act which

obligates the company to maintain its accounts in a manner provided by the

Companies Act and 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 Registrar of Companies which has a

statutory obligation also to examine and satisfy that the accounts of the

company are maintained in accordance with the requirements of the



21

Companies Act. It was held that if these procedures were complied with, it

was not open to the assessing officer to re-scrutinize this account and satisfy

himself that these accounts have been maintained in accordance with the

provisions of the Companies Act. The same view was reiterated in the case of

Malayala Manorama reported in 300 ITR 251 by the Apex Court.

23. This principle was also applied by the Mumbai Bench of the

Tribunal in the case of DCIT vs. Bombay Diamond Co reported in 33 DTR 59.

In that case, the assessee earned a capital profit of Rs.10.38 crores on sale of

rights to immovable property which was directly credited to the capital

reserves in the balance sheet instead of being routed through the profit and

loss account. The accounts of the assessee company were duly certified by the

auditors and were also adopted in the Annual General Meeting. The audited

accounts were filed with Registrar of Companies. In the computation of Book

Profits for S. 115JB of the Act, the said capital profits were not included. The

assessing officer took the view that by not crediting the capital profit to the

profit and loss account, the assessee had contravened the sub clause [xi][a] of

clause 3 of Part II of the 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

S.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 was not relevant. The

Tribunal distinguished the decision in the case of Appollo Tyres [supra] on the

ground that as the assessee had by-passed the provisions of Schedule VI and

directly credited the capital profit to the reserve account, decision in the case

Apollo Tyres did not apply. In the case under consideration, the department is



22

in better footing, as the assessee company itself the 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 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 included in the net profit determined as per Profit and loss 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 the assessee that the capital gain earned by

the assessee was not included in the net profit determined as per Profit and

loss account of the assessee prepared under the Companies Act. As per the

audited accounts of the assessee, the statutory auditors have reported that

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 further reported

that 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. As per audited profit and loss

account, the assessee has included long term capital gain. In the notes on

accounts, 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 to be

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. Hence, it is not a case of the assessee 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. Only in the computation of book profit

under section 115JB of the Act, the assessee claimed exclusion of long term

capital gain which is exempt under S.47 [iv] of the Act. It is due to fact that

the assessee claimed deduction of long term capital gain from book profit by

virtue of being exempted income in the normal provisions of the Act and not

because of the reason that the same was not includible in profit and loss



23

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 sec 115 JB. At this point it is not

necessary for us dwell upon the situation, where the Assessee has directly

credited the profit on sale of asset to a reserve Account. The Proviso to sec

115JB prescribes that the accounting policies, accounting standards and the

method and rates of depreciation adopted for preparing the Book Profits u/s

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 u/s 115JB. Capital gains on sale of shares were

included in computing the profits presented before the shareholders and the

same should be also be included in computing Book profits u/s 115JB.

The Kerala High Court in the case of N.J.Jose & Co (P) Ltd v ACIT (217 CTR

479) has held that capital gains, even though exempt under the normal

provisions of Income tax under sec 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 there under is to adopt the P&L a/c of the assessee

prepared in accordance with the provisions of Parts II and III of Sch. VI

to the Companies Act, 1956 and to treat the net profit shown therein as

book profit. The permissible adjustments in the form of additions and

deductions are provided under explanation to Sec 115J (1A) of the Act.

No more deductions, rebates or allowances other than what is stated in

the said Explanation are available for the computation of book profit. In

fact, it is very clear from the non obstante clause in Section 115J(1) that



24

the assessment under Section 115J overrides other provisions of the Act

In fact, only when the total income computed under the provisions of

the Act is below 30 percent of the book profit of the assessee as

contemplated under the said section. While deductions, rebates and

allowances are available in the computation of income for normal

assessment, additions, deductions and adjustments except to the extent

covered by the Explanation to Section 115J(1A) are not available in the

computation of book profit. IN other words, once the AO finds that total

income as computed under the provisions of the Act is less than 30

percent of the book profit, he has to give up normal assessment and

proceed to make assessment. The AO has to opt for the assessment

under Section 115J which does not provide for any deduction in terms of

Section 54E of the Act. The assessee has no case that the long term

capital gain is not profit includible in the P&L account prepared in terms

of Schedule – VI of the Companies Act. Since there is no provision I

Chapter – XIIB for deduction of capital gains in the computation of book

profit, the assessee is not entitled to the deduction claimed. The

Bombay High Court in the decision in CIT Vs Veekaylal Investments Co

(P) Ltd (2001) – 166 CTR (Bom) 96 : (2001) 249 ITR 597 (Bom) also

took the view that capital gains 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 u/s 115J.”



25

In the decision of the Bombay High Court in the case of CIT v Akshay Textiles

Trading and Agencies P Ltd (304 ITR401) the question referred to the High

Court and the decision of the High Court, as reported are s 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 hooding 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 Vs Veekaylal Investment Co P Ltd – 249 ITR 597 was not

applicable?

In so far as question No. “C”, our attention is invited to the judgment of

the Supreme Court in Apollo Tyres Ltd Vs CIT – 255 ITR 273. The

question framed therein which is similar to question NO.”C” has been

answered in favour of the assessee and against the Revenue. In the

light of that the question of law as framed would not arise”.

From the above it is difficult to conclude that the Division bench of Bombay

High Court in this case has overruled the decision of another division bench

without even a line of discussion. The decision of the Bombay High Court in the

case of Veekay Lal Investments Co P Ltd holding that the book profits have to

be computed in accordance with Parts II and III of Sch.VI to the Companies

Act. This is in line with the decision of the Apex Court in the case of Apollo

Tyres Ltd Supra. The Mumbai High Court in the case of Akshay Textiles Trading

and Agencies P Ltd has held that there is no question of law in view of the

decision of the Apex Court in the case Apollo Tyres Ltd, supra. From this we

are no able to infer that the decision of the Bombay High Court in the case of

Veekaylal Incvetments Co P Ltd is no longer good law. Therefore this case does

not help the assessee.



26

The Delhi Court in the case CIT v Sain Processing & Weaving Mills (P) Ltd (221

CTR 493) has held that Company – Book profit u/s.115J – depreciation not

debited to P&L account – It is obligatory under clause 3(iv) of Part II of

Schedule VI to the Companies Act to give information with regard to

depreciation which has not been provided for, along with the quantum of

arrears – Once this information is disclosed in the notes to the accounts, it

would clearly fall within the ambit of the explanation to Section 115J – Notes to

the accounts form part of the P&L account by virtue of sub-section (6) of

Section 211 of the Companies Act and thus the depreciation which is not

charged to P&L account but is disclosed in the notes to the accounts would

come within 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 take into account while determining ‘book profit’ under

Section 115J as long a sit forms part of the prescribed accounts – That apart,

section 205(1), proviso (b) of the Companies Act r/w clause (iv) of Explanation

to Section 115J permits reduction of net profit to the extent of past losses or

unabsorbed depreciation, which ever 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 (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 VeeKay Lal Investment Company Ltd. (supra) that capital gain is to be

included in the book profit. In that case of Veekay Lal Investment Company

Ltd., 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 (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



27

the Tribunal rendered in the case of Sutlej Cotton Mills (supra) is of no avail to

the assessee.

25. It is to be noted that the assessee has not made any claim of

deduction of long term capital gain 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. Moreover,

the taxability of capital gain is relevant only for the purpose of computation of

income 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 III of Schedule VI to the Companies Act. Under these

circumstances, as 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 47 [iv] of the Act has no application

in the computation of book profit under section 115JB of the Act where as

section like 80HHC etc., find place in the exclusion item.

26. It is the case of the assessee that since the capital gain arising

from the transfer of a long term capital asset was exempt to the assessee shall

not be charged to tax as so provided in section 47 [iv] of the Act, and as such

the same is to reduced from the net profit determined in the Profit and loss

account prepared by the assessee while computing "Book-profit" within the

meaning of section 115JB of the Act. The learned counsel for the assessee

strongly contended that the provisions contained in sub section (5) of S.115 JB

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 115 JB of the

Act, the assessee is entitled to reduce the long term capital gain exempted



28

under S.47 [iv] of the Act. For this proposition the Assessee relies on the

decision of the Mumbai tribunal in the case of Frig Sales (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 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 exemption allowed by one provision of the Act

cannot be taken away by another provision of the Act, and, thus, in that case,

the Tribunal hold that if the exemption allowed under section 50 was taken

away while taxing the book profits under section 115JA, it would make the

provision of section 50 redundant. In this decision, a reference to the decision

of Hon'ble Mumbai High Court in the case ofCIT vs. Veekay Lal Investment Co.

(P) Ltd. (2000) 249 ITR 597 was made but the same was not discussed or

deliberated upon or relied upon by the Tribunal by observing that this decision

was rendered as per the provisions of section 115J, which is self contained

code, though a new sub section (4) has been inserted first time in section 115

JA of the Act. We have carefully gone through the aforesaid decision of the

Tribunal in the case of ITO vs. Frigsales (India) Ltd. We have also perused the

provisions of section 115J, 115JA and 115JB of the Act. All these sections are

deeming provisions. Section 115J has overriding effect over all other provisions



29

of the Act. Section 115JA and 115JB have also overriding effect over all other

provisions of the Act to the extent of matter provided in these sections. Sub

section (4) was inserted in section 115JA of the Act. A provision similar to sub

section (4) of section 115JA was not there in section 115J of the Act.

Subsection (4) of section 115JA reads as "save as otherwise provided in this

section, all other provisions of the Act shall apply". It is, thus, clear that all

other provisions of the Act shall apply but subject to the provisions otherwise

provided in section 115JA of the Act. In other words, the provisions specifically

provided in section 115JA shall have override effect over all other provisions of

the Act. The provision for computing book profit 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 of 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 115 J 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 ITO

vs. Frigsales 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 CIT vs. Veekay Lal Investment Co. (P) Ltd. (supra)

for the reason that these decisions were rendered in the context of provisions

of section 115 J of the Act, but the fact remains that the propositions laid down

by Hon'ble Supreme court in the case of Apollo Tyres have been reiterated and

relied upon by the Hon'ble Supreme Court in the case of CIT vs. HCL Comnet

Systems and Services Ltd. (supra) which has been rendered in the context of

section 115JA of the Act. As per sub section (5) of S.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 of the Act, we are of the considered



30

opinion 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

have 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 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. It is also held by Karnataka High Court in the case

of Jindal Thermal Power Co. Ltd., Vs. DCIT reported in 286 ITR 182, that

except for substitution of the tax payable under the provisions and manner of

computation of book profits, all the provisions of the tax including the provision

relating to charge, definitions, recoveries, payment, assessment, etc., would

apply in respect of the provisions of this section and in view of the scheme of

the Income tax Act.

27. It is not the intension of the legislature to substitute the 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 under S.115JB of the Act 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. The

starting 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 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 case of Apollo Tyres Ltd. (supra) and HCL

Comnet Systems and Services Ltd. (supra) had clearly laid down a law that the

Assessing officer has only limited power of making increases and reductions to



31

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 S.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 115 JB

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 "Book-profit" under section 115JB of

the Act, the same would certainly be against the above referred decisions laid

down by the Honorable Supreme Court in the case of Apollo Tyres (supra) and

HCL Comnet Systems & Services Ltd. (supra) wherein the powers of the

assessing officer while computing the book profits for the purpose of section

115 J or 115 J A were limited as discussed above. The case laws relied upon by

the learned counsel for the assessee, several cases were rendered before the

decision of the Apex Court in the case of Apollo Tyres and HCL Comnet and the

rest of the cases, the facts are distinguishable. Even declaration of dividend is

not a must for application of S.115JB. The purpose of this section is to tax

companies which were making profits but not paying taxes due to so many

exemptions and deductions. The reference to the declaration of dividend in the

context of S.115 JB by the Finance Minister or by the circulars are merely

explanations to the kind of malaise that the section sought to address. For



32

invoking this section, there is no prerequisite condition that the company

should have declared dividend to the share holders.

29. The next issue for consideration is the character of exemption

granted u/s 47(iv), 47(v) and 50. These are not total exemption but in the

nature of deferment of tax. The exemption granted under sec 47(iv)/47(v), in

respect of transfer from/to Holding Company to/from its wholly owned

subsidiary is not a complete exemption from taxation but only a deferment. For

example, if within 7 years of transfer, the Holding company ceases to hold

100% of shares of subsidiary, then the capital gains not taxed in view of sec

47(iv)/ 47(v) gets taxed under sec 47A. Further when the transferee sells the

asset the cost of acquisition is taken as the cost of 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 sec

47(iv)/47(v) is computed by taking cost of acquisition (and in some cases

notional market value as on 1.4.84) 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 Sec 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 u/s 50. We therefore do not find any force in the argument



33

profits exempt u/s 50 should be excluded in computing the Book Profits.

Further whenever the Legislature wanted income exempted under the normal

provisions of the Act to be excluded from the computation of book profits, they

have provided so. Under explanation (ii) and Explanation (f) to sec 115JB, the

income and expenditure to which provisions of sec 10,11 and 12 apply are to

be excluded from the computation of Book Profits. Similarly, if any deduction

permitted under the normal provisions of the Act are intended to be deducted

from the Book profits also the same is specifically provided. Deductions u/s

80HHC, 80HHD, 80HHE,80HHF and deduction u/s 80IA, 80IB were specifically

excluded from the computation of Book profits at various times. 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 Commissioner in

holding that the 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 under S.115 JB of the Act. We

further hold that merely because the long term capital gain is exempt under

section 47 [iv] of the Act 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 under S.115JB of the Act when the Explanation to

section 115JB does not provide for any deduction in terms of section 47 [iv] of

the Act. In other words, we hold that section 47 [iv] of the Act has no

application in the computation of book profit under S.115JB of the Act. Thus

from a reading of the section 115JB as well as the analyses of various High

Court 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 Sch. 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 no

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,



34

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 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 the Act, the assessee is not

entitled to the exclusion thereof as claimed.

31. Before parting with this appeal, we wish to place on record our

appreciation for the illuminating arguments put forward by both the parties on

this issue, whish assisted us in disposing this appeal.

32. In the result, we answer the question referred to us against the

assessee.

The order pronounced on 2-7-2010.

Sd/- Sd/- Sd/-

(ASHA VIJAYARAGHAVAN) (G.C.GUPTA) (AKBER BASHA) JUDICIAL MEMBER VICE-PRESIDENT ACCOUNTANT MEMBER

jmr*



35

Hyderabad, Dt : 2-7-2010.

Copy forwarded to :-

1. Rain Commodities Limited, Plot No.34, Rain Centre, Srinagar Colony,

Hyderabad- 500 073.

2. DCIT, Cir- 3(1), Hyderabad.

3. CIT-III, Hyderabad.

4. The DR, ITAT, Hyderabad.

1.


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