Tribunal excludes partnership firm's share income from book profit calculation under section 115JB

The Tribunal ruled in favor of the assessee, finding the tax planning legitimate and not a colorable device. The partnership firm's share income was directed to be excluded from computing book profit u/s 115JB, setting aside the CIT(A)'s order that upheld its inclusion.

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Issues:
Whether long term capital gain earned by a partnership firm, in which the assessee is a major partner, is includible in book profit computed u/s 115JB of the Act.

Analysis:
The appeal was against the decision upholding the inclusion of long term capital gain earned by a partnership firm in book profit u/s 115JB of the Act. The assessee, a private limited company, held equity shares in companies and formed a partnership firm with two directors. The AO alleged a colorable device to evade tax by transferring shares to the firm. The AO relied on the McDowell case to include the gains in book profit. The CIT(A) agreed, citing the Dynamic Orthopaedic case. The issue was whether the arrangement was legitimate tax planning or a colorable device.

The assessee argued that legitimate tax planning is not a colorable device, citing the Walfort Share and Stock Brokers case. The Supreme Court distinguished between colorable devices and legitimate tax planning. The assessee's formation of the partnership and share transfer were within the law. The partnership firm filed declarations as beneficial owner. The accounts were audited and approved at the AGM, as per the Apollo Tyres case. Section 115JB requires excluding exempt share profits from book profit.

The Tribunal found the assessee's actions as legitimate tax planning within the law, not a colorable device. The partnership firm's return was accepted by the department. The Tribunal directed the AO to exclude the share income from the partnership firm while computing book profit u/s 115JB. The appeal was allowed, setting aside the CIT(A)'s order.

In conclusion, the Tribunal ruled in favor of the assessee, finding the tax planning legitimate and not a colorable device, directing the exclusion of share income from the partnership firm in computing book profit u/s 115JB.

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