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 total income under the Income-tax Act; if that income is less than 30% of book profits, total income is deemed to be 30% of book profits. Schedule VI (Parts II & III) requires disclosure of non-recurring or exceptional receipts (including surrender of leasehold rights/capital gains) in the profit and loss account, so capital gains are includible. Decision for the Department 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.

---