2011 (7) TMI 86 - HC - Income Tax

Court rulings on rent, repairs disallowance, book profit inclusion, and notional income taxability with interest charges.

GKW Ltd. Versus Commissioner of Income-tax, West Bengal - IV

The court upheld the disallowance of rent and repairs related to a guest house under section 37(4) and the inclusion of profit on the sale of fixed assets ... Book profit u/s 115JA - Profit on sale of fixed assets - disallowance u/s 37(4) - It is now a settled law that if a particular income shown in the account of profit and loss is not taxable under the Act, it cannot be taxed on the basis of estoppel or any other equitable doctrine - Tribunal below committed a substantial error of law in treating the amount of ₹ 228.34 lakh as chargeable to Income-tax notwithstanding the fact that the same did not come within the purview of section 28(iiia) of the Act when the license had not been sold and no profit had come in the hand of the appellant - Decided in favour of the assessee A plain reading of the aforesaid provisions makes it abundantly clear that where in the case of an assessee, being a company, the total income, as computed under the Act in respect of any previous year relevant to the assessment year commencing on or after the 1-4-1997 but before the 1-4-2000 is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit and in such a case, such assessee shall prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 - it is absurd to suggest that the profit on sale of fixed assets amounting to ₹ 6,02,91,024 did not form part of the book profit under section 115JA - Decided in favour of the revenue Issues Involved:1. Disallowance of rent and repairs referable to guest house under section 37(4).2. Taxability of notional figure of Rs. 228.34 lakh as income under section 28(iiia).3. Inclusion of profit on sale of fixed assets amounting to Rs. 6,02,91,024 in book profit under section 115JA.4. Applicability of advance tax provisions under section 115JA and charging of interest under section 234B.Issue-wise Detailed Analysis:1. Disallowance of Rent and Repairs Referable to Guest House under Section 37(4):Mr. Khaitan, the learned Senior Counsel for the appellant, conceded that this issue should be decided against his client in view of the Supreme Court decision in Britannia Industries Ltd. v. CIT [2005] 278 ITR 546/148 Taxman 468. Consequently, the Tribunal's decision to disallow rent and repairs and maintenance charges of the guest house is upheld.2. Taxability of Notional Figure of Rs. 228.34 Lakh as Income under Section 28(iiia):Mr. Khaitan argued that under section 28(iiia) of the Act, only the profits on the actual sale of a licence granted under the Imports (Control) Order, 1955, are chargeable to Income-tax, not a notional figure. The Tribunal erred in treating Rs. 228.34 lakh as income since it was a notional figure and not actual profit. The court found merit in this argument, noting that the legislature intended only actual profits from the sale of licenses to be taxable, unlike cash assistance or duty drawbacks under subsections (iiib) and (iiic), which are automatically chargeable to tax. The Tribunal's decision to treat the notional figure as income was thus a substantial error of law. The point is answered in favor of the assessee.3. Inclusion of Profit on Sale of Fixed Assets in Book Profit under Section 115JA:Section 115JA mandates that if an assessee's total income is less than thirty percent of its book profit, the total income chargeable to tax shall be deemed to be thirty percent of such book profit. The assessee must prepare its profit and loss account in accordance with Parts II and III of Schedule VI to the Companies Act, 1956. This includes disclosing profits on the sale of fixed assets as non-recurring transactions. The court found that the profit on the sale of fixed assets amounting to Rs. 6,02,91,024 must form part of the book profit under section 115JA, agreeing with the Tribunal's decision.4. Applicability of Advance Tax Provisions and Charging of Interest under Section 234B:Mr. Khaitan conceded that this issue should also be decided against his client in view of the Supreme Court decision in Jt. CIT v. Rolta India Ltd. [2011] 330 ITR 470/196 Taxman 549/9 Taxman.com 36 (SC). Consequently, the Tribunal's decision to uphold the charging of interest under section 234B is affirmed.Conclusion:The appeal is allowed in part. The point regarding the taxability of the notional figure of Rs. 228.34 lakh is decided in favor of the assessee. The points concerning the disallowance of guest house expenses, inclusion of profit on the sale of fixed assets in book profit, and applicability of advance tax provisions are decided against the assessee. There will be no order as to costs.