2015 (8) TMI 979 - AT - Income Tax

Tribunal decision: Exclude development rights profit from book profit calculation

M/s Shivalik Venture Pvt. Ltd. Versus Dy. Commissioner of Income Tax-8 (3), Mumbai

M/s Shivalik Venture Pvt. Ltd. Versus Dy. Commissioner of Income Tax-8 (3), Mumbai - [2015] 43 ITR (Trib) 187 (ITAT [Mum]) Issues Involved:1. Inclusion of profit from the transfer of development rights to a wholly owned subsidiary in book profit under Section 115JB of the Income Tax Act, 1961.2. Disallowance under Section 14A of the Income Tax Act.Issue-wise Detailed Analysis:1. Inclusion of Profit from Transfer of Development Rights in Book Profit under Section 115JB:The primary issue is whether the profit arising from the transfer of development rights to a wholly owned subsidiary should be included in the book profit under Section 115JB of the Income Tax Act.- Facts: The assessee, engaged in the development and leasing of commercial complexes and rehabilitation under the Slum Rehabilitation Scheme, transferred development rights to its wholly owned subsidiary, generating a Long Term Capital Gain (LTCG) of Rs. 300.68 crores. The assessee did not include this amount in its book profit, citing it as a capital receipt not regarded as a transfer under Section 47(iv) and thus not taxable under Section 45.- Contentions:- Assessee's Argument: The profit should not be included in the book profit as it is a capital receipt and not considered income under Section 2(24). The profit and loss account should be read along with the notes to accounts, which explicitly state that the profit is not includible under Section 115JB.- Revenue's Argument: Section 115JB is a self-contained code, and only prescribed items can be excluded from the net profit. The profit from the transfer, included in the profit and loss account, should be part of the book profit as per the Special Bench decision in Rain Commodities Ltd.- Tribunal's Analysis:- Notes to Accounts: The Tribunal agreed with the assessee that the notes to accounts should be read along with the profit and loss account. The net profit should be adjusted for items disclosed in the notes, aligning with the decisions in Sain Processing & Weaving Mills (P) Ltd. and K.K. Nag Ltd.- Legal Interpretation: The Tribunal held that since the profit from the transfer is not considered income under Section 2(24) and does not enter the computation provisions, it should not be included in the book profit under Section 115JB.- Distinguishing Rain Commodities Ltd: The Tribunal distinguished the present case from Rain Commodities Ltd., noting that the latter did not involve notes to accounts clarifying the exclusion of such profit.Conclusion: The Tribunal directed the AO to exclude the profit from the transfer of development rights from the book profit computation under Section 115JB.2. Disallowance under Section 14A:The second issue is whether the disallowance made under Section 14A, relating to the expenditure incurred in earning exempt income, should be sustained.- Facts: The assessee earned dividend income of Rs. 3,49,66,452 and disallowed Rs. 60,01,613 under Section 14A. The AO, applying Rule 8D, computed the disallowance at Rs. 96,42,062, which was upheld by the CIT(A) with a direction to correct the average value of investments.- Contentions:- Assessee's Argument: The assessee contended that it had sufficient interest-free funds exceeding the investments and that interest-bearing funds were used for specific purposes. The disallowance should be limited to the amount self-disallowed.- Revenue's Argument: The CIT(A) upheld the disallowance in principle but directed the AO to correct any clerical errors in the average value of investments.- Tribunal's Analysis:- Interest-Free Funds: The Tribunal noted that the tax authorities did not consider the availability of interest-free funds. The issue requires fresh examination to verify the assessee's claims.- Remand to AO: The Tribunal set aside the CIT(A)'s order and remanded the issue to the AO for fresh examination, considering the availability of interest-free funds and the correct average value of investments.Conclusion: The Tribunal directed the AO to re-examine the disallowance under Section 14A, considering the assessee's contentions and the correct average value of investments.Final Decision:The appeal filed by the assessee was allowed, with directions to the AO to exclude the profit from the transfer of development rights from the book profit computation and to re-examine the disallowance under Section 14A.