Tribunal Excludes Notional Interest from Book Profits, Highlights Importance of Companies Act in Tax Computation.

The Tribunal partly allowed the appeal, deciding that notional income from interest on zero coupon bonds should be excluded from book profits under section 115JA. The issue regarding allocation of expenditure against dividend income was dismissed due to lack of necessary approval. The judgment emphasized adherence to the Companies Act in book profit computation and the binding nature of CBDT circulars in tax assessments.

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Issues:
1. Allocation of expenditure against income exempt and disallowance.
2. Add back of interest on zero coupon bonds for book profit calculation under section 115JA.

Issue 1: Allocation of Expenditure against Income Exempt and Disallowance

The appellant, a nationalized bank, appealed against the order of the CIT(A) regarding the computation of total income under section 115JA of the Income-tax Act, 1961. The Assessing Officer did not exclude the income from interest on zero coupon bonds while computing book profit for tax levy. The appellant contended that income exempt from tax should be appropriately adjusted in arriving at book profit. The CBDT clarified that interest on zero coupon bonds would not be taxable income. The CIT(A) held that although not taxable 'per se,' it cannot be excluded in arriving at book profit. The appellant argued that since the interest on zero coupon bonds was not liable to income tax, it should be excluded from book profit under section 115JA.

Issue 2: Add Back of Interest on Zero Coupon Bonds for Book Profit Calculation under Section 115JA

The appellant maintained that the interest on zero coupon bonds recorded in the profit and loss account was not actual income but a notional entry. The CBDT circular clarified that the difference between purchase and redemption price of zero coupon bonds was not to be treated as interest income. The Tribunal held that since the entire income from interest on zero coupon bonds did not accrue during the year, it should be excluded from book profits under section 115JA. The Tribunal emphasized that the Assessing Officer cannot rework book profit if computed in accordance with the Companies Act and that notional income from zero coupon bonds should be excluded from book profit calculation.

In conclusion, the Tribunal partly allowed the appeal, ruling that the notional income from interest on zero coupon bonds should be excluded while computing book profits under section 115JA. The issue of allocation of expenditure against dividend income was dismissed for lack of necessary approval. The judgment highlighted the importance of adhering to the Companies Act in computing book profits and the binding nature of CBDT circulars in tax assessments.

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