2005 (6) TMI 478 - AT - Income Tax

Tribunal Remands Issue for Fresh Consideration; Upholds Exclusion of Capital Gains from Book Profits u/s 115JA.

Income-tax Officer, Ward-3 (1) Versus Frigsales (India) Ltd.

The Tribunal partially allowed the revenue's appeal. It remanded the issue concerning the Rs. 10,00,000 addition back to the AO for fresh consideration, ... Minimum alternate tax - sale of capital assets - exemption under the provisions of section 50 - HELD THAT:- In the present case, if the exemption allowed under section 50 of the Act is taken away while taxing, the book profits u/s 115JA, it will make the provision of section 50 of the Act as redundant. This interpretation is not justified. The ratio of Apollo Tyres [2002 (5) TMI 5 - SUPREME COURT] distinguishable because the same has been rendered in the context of provisions of section 115J which is independent code, while section 115JA is not an independent code and the Legislature in their wisdom has brought sub-section (4) of section 115JA on the statute to make section 115JA also a part of the Act. Regarding relevance of the decision relied on by the revenue in the case of Indo Marine Agencies (Kerala) (P.) Ltd. v. Asstt. CIT [1994 (8) TMI 69 - ITAT COCHIN] and CIT v. Veekaylal Investment Co. (P.) Ltd. [2001 (2) TMI 117 - BOMBAY HIGH COURT]. These cases were rendered as per the provisions of section 115J which is self-contained code. As has been held in a number of cases, whereas section 115JA is not self-contained code. Sub-section (4) has been inserted first time and it has made section 115JA also a part of the Act. Therefore, exemptions allowed under one provision of the Act, cannot be taken away by another provision of the Act. In the above cases, there is a capital gain which was taxable u/s 45 of the Act. So, the Hon’ble Courts decided that once income u/s 45 is includible in the taxable income, why the same income should not be included in the book profits determined u/s 115JA of the Act. But in the present case, the capital gains earned by the assessee are exempt u/s 50 of the Act and they will not form part of the taxable income. Therefore, this exempted income should not be a part of the capital gains. Section 115JA only stipulates total income based on book profits, but does not enlarge the scope of the income. In other words, a receipt which is not in the nature of income cannot be taxed as income u/s 115JA. Similar view has been taken by the Bombay Bench ‘B’ of the Tribunal in the case of Rolta India Ltd. v. Joint CIT [IT Appeal No. 20 (Mum.) of 2001], for the assessment year 1997-98, which has been authored by Hon’ble Accountant Member who is one of the Members of this constitution. Relying on the provisions of sub-section (4) of section 115JA, the Tribunal has observed that section 115J is distinguishable from the present section. Thus, we are not inclined to interfere in the finding of the learned CIT(A). The same is upheld. As a result, the appeal of the revenue is partly allowed. Issues Involved:1. Applicability of Section 41(1) regarding the addition of Rs. 10,00,000.2. Inclusion of capital gains in the computation of profit under Section 115JA.Issue-wise Detailed Analysis:1. Applicability of Section 41(1) regarding the addition of Rs. 10,00,000:The first issue concerns the addition of Rs. 10,00,000 in the sundry creditors suspense account. The Assessing Officer (AO) found that the assessee could not identify the persons to whom this amount was payable, leading the AO to conclude that this amounted to a cessation of liability, thereby invoking Section 41(1) of the Income-tax Act to tax the amount.The assessee contended that the liability was related to the Madras branch, whose books were misplaced after the branch's closure. The CIT(A) observed that merely failing to furnish details does not imply a cessation of liability and that the onus was on the AO to establish the applicability of Section 41(1). The CIT(A) found no material evidence to support the AO's conclusion and thus deleted the addition.Upon appeal, the Tribunal noted the arguments from both sides and decided to set aside the lower authorities' orders. The Tribunal restored the issue to the AO for reconsideration, directing the AO to provide the assessee an opportunity to produce the details of sundry creditors.2. Inclusion of capital gains in the computation of profit under Section 115JA:The second issue pertains to whether capital gains should be included in the computation of profit under Section 115JA. The AO included Rs. 83,26,670 from the sale of capital assets in the book profits, arguing that the book profits, as per Part II and Part III of Schedule VI of the Companies Act, should reflect this amount.The assessee argued that the capital gains arose from the sale of a depreciable asset and were reinvested in another asset, thus should not be considered business profits under Section 115JA. The CIT(A) agreed with the assessee, referencing various Tribunal decisions, including that of the Special Bench in Sutlej Cotton Mills Ltd., which held that book profits under Section 115J do not include capital gains exempt under Section 54E.The Tribunal upheld the CIT(A)'s decision, noting that Section 115JA, unlike Section 115J, includes sub-section (4), which states that all other provisions of the Act shall apply. Thus, exempt income under one provision cannot be taxed under another. The Tribunal found that the capital gains, being exempt under Section 50, should not be included in the book profits for Section 115JA purposes.Conclusion:The Tribunal partially allowed the revenue's appeal. The issue regarding the Rs. 10,00,000 addition was remanded back to the AO for fresh consideration, while the CIT(A)'s decision to exclude capital gains from the computation of book profits under Section 115JA was upheld.