2001 (2) TMI 117 - HC - Income Tax

Section 115J: Capital gains under Section 45 must be included in book profits for tax computation

HC held that for computing book profits under section 115J, income by way of capital gains under section 45 must be included. A company must first compute ... Company - Deemed Income - income derived from the property as long-term capital gains - Whether the income from capital gains should be included for the purposes of computing book profits under section 115J of the Income tax Act ? - HELD THAT:- According to section 115J(1), 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. That, the assessee has to first compute the total income in accordance with the Income-tax Act and if the total income is less than 30 per cent. of the book profit 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 to 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 is less than 30 per cent. of its book profits then, fictionally, it will be deemed that its total income chargeable to tax would be an amount equal to 30 per cent. 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 and if the total income so computed is less than 30 per cent. of the book profits then the profit and loss account shall have to be prepared in accordance with Part II and Part III of Schedule VI to the Companies Act. The important thing to be noted is that while calculating the total income under the Income-tax Act, the assessee is required to take into account income by way of capital gains under section 45 of the Income-tax Act. 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 leasehold 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 exceptional nature. Lastly, even under clause 3(xii)(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 purposes 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). In the circumstances, the question is answered in the affirmative, i.e., in favour of the Department and against the assessee. Issues involved: Whether income from capital gains should be included for computing book profits u/s 115J of the Income-tax ActRs.Summary:The High Court of BOMBAY heard an appeal filed by the Department against a Tribunal decision regarding the inclusion of income from capital gains for computing book profits u/s 115J of the Income-tax Act. The case involved the assessee, Veekaylal Investment Co. Pvt. Ltd., declaring a net loss but offering income from land sale as long-term capital gains. The Assessing Officer treated the profits as capital gains under section 45, leading to a dispute. The Tribunal ruled in favor of the assessee, citing a judgment from the Special Bench, Calcutta. The Department appealed the decision.Facts:The Department argued that capital gains should be considered for computing book profits u/s 115J, emphasizing the non obstante clause in section 115J and provisions of the Companies Act. The assessee's representative contended that capital gains were not part of commercial profits as per accounting practices and Schedule VI of the Companies Act. The Tribunal's decision was based on similar reasoning.Findings:The High Court found merit in the Department's appeal, stating that section 115J requires the computation of total income based on the Income-tax Act and book profits according to the Companies Act. The Court highlighted that capital gains should be included for computing book profits, as per the provisions of the Companies Act and accounting practices. The judgment favored the Department and ruled against the assessee.Conclusion:The Court answered the issue in the affirmative, supporting the inclusion of capital gains for computing book profits u/s 115J. The case was expedited accordingly.