Tribunal rules grant-in-aid not deductible from book profits under Income Tax Act

The Tribunal held that the grant-in-aid and compensation received by the assessee could not be excluded from the book profits under Section 115JB of the Income Tax Act. The Tribunal emphasized the legislative intent and overriding provisions of Sections 115J, 115JA, and 115JB, stating that the computation of book profit should strictly adhere to the Explanation to Section 115JB. As the receipts were not covered by any clauses in Explanation 1 to Section 115JB, the Revenue's appeal was allowed, and the assessee's claim for deduction of Rs. 50,56,630 from the book profits was rejected.

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Issues Involved:
1. Whether the grant-in-aid and compensation received by the assessee should be excluded from the book profits under Section 115JB of the Income Tax Act.
2. Whether the assessee's treatment of these receipts as capital receipts, not liable to tax under Section 115JB, is valid.

Detailed Analysis:

Issue 1: Exclusion of Grant-in-Aid and Compensation from Book Profits under Section 115JB

The Revenue contended that the Commissioner of Income-tax (Appeals) erred in allowing the deduction of Rs. 50,56,630 from book profits under Section 115JB of the Income Tax Act, which includes Rs. 49,92,354 received as machinery grant from the Central Government and Rs. 64,276 as compensation from the State Government. The assessee had included these amounts under 'Other Income' in the Profit & Loss Account, resulting in an overstatement of revenue profits. The assessee argued that these were capital receipts and should not be taxed under Section 115JB, as they were not operational business income.

Issue 2: Treatment of Receipts as Capital Receipts

The assessee claimed that the machinery grant and compensation for damages were capital receipts, not liable to tax under Section 115JB. The assessee prepared its Profit & Loss Account per Schedule VI of the Companies Act, 1956, and treated these receipts as part of the book profits. The assessee relied on various judicial precedents, including the decision of the Tribunal, Calcutta Special Bench in Sutlej Cotton Mills Ltd vs. ACIT, which emphasized that only operational business income should be taxed under Section 115JB.

Tribunal's Findings:

1. Compliance with Schedule VI of the Companies Act:

The Tribunal noted that the assessee had not claimed any deduction of these receipts from the book profit, indicating that these receipts were not deductible from the net profit prepared per Schedule VI of the Companies Act. The Tribunal emphasized that the taxability of these receipts is relevant only for computing income under the normal provisions of the Income Tax Act, not for preparing the Profit & Loss Account under Schedule VI.

2. Legislative Intent and Overriding Provisions:

The Tribunal referred to the overriding effect of Sections 115J, 115JA, and 115JB over other provisions of the Income Tax Act. The Tribunal highlighted that the computation of book profit should strictly follow the Explanation to Section 115JB, which does not provide for the exclusion of such receipts.

3. Judicial Precedents:

The Tribunal relied on the Supreme Court decisions in Apollo Tyres Ltd. and HCL Comnet Systems and Services Ltd., which limited the Assessing Officer's power to make adjustments to the net profit shown in the Profit & Loss Account, except as provided in the Explanation to Section 115JB. The Tribunal also referred to the Karnataka High Court's decision in Jindal Thermal Power Co. Ltd., which supported the view that the computation of book profit under Section 115JB should strictly adhere to the provisions of the section.

Conclusion:

The Tribunal concluded that the grant-in-aid and compensation received by the assessee could not be excluded from the book profits under Section 115JB, as these receipts were not covered by any of the clauses in Explanation 1 to Section 115JB. Therefore, the appeal of the Revenue was allowed, and the assessee's claim for deduction of Rs. 50,56,630 from the book profits was rejected.

Order:

The appeal of the Revenue is allowed, and the order was pronounced on Wednesday, the 12th of August, 2015, at Chennai.

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