Book profit under section 115JB must reflect accounts with notes, while section 14A computation needs factual re-examination.

For computation of book profit under section 115JB, the net profit shown in the profit and loss account must be read with the notes to accounts, and a disclosed gain on transfer of development rights to a wholly owned subsidiary was treated as outside book profit where the transaction was also not taxable under the normal provisions by reason of section 47(iv). The article further notes that disallowance under section 14A read with Rule 8D depends on factual verification of available interest-free funds and the correct average value of investments, so the computation required fresh examination by the Assessing Officer.

---

---

Issues: (i) Whether profit arising on transfer of development rights to a wholly owned subsidiary company was includible in book profit under section 115JB of the Income-tax Act, 1961; (ii) Whether the disallowance under section 14A was required to be sustained or re-examined.

Issue (i): Whether profit arising on transfer of development rights to a wholly owned subsidiary company was includible in book profit under section 115JB of the Income-tax Act, 1961.

Analysis: The starting point for computation under section 115JB is the net profit shown in the profit and loss account prepared in accordance with the Companies Act. The Notes forming part of accounts are to be read along with the profit and loss account. Where the assessee specifically disclosed in the notes that the gain on transfer to the subsidiary was not to be treated as part of book profit, the net profit had to be adjusted accordingly. The receipt also did not constitute taxable capital gains under the normal provisions because the transaction was covered by section 47(iv), and therefore did not enter the computation of income under the charging provisions.

Conclusion: The profit was held not includible in book profit under section 115JB, and the addition was directed to be excluded in favour of the assessee.

Issue (ii): Whether the disallowance under section 14A was required to be sustained or re-examined.

Analysis: The availability of sufficient interest-free funds and the correct average value of investments were not properly examined by the lower authorities. Since these factual aspects were material to the computation under section 14A read with Rule 8D, the matter required fresh consideration by the Assessing Officer.

Conclusion: The disallowance issue was set aside for fresh adjudication and remand to the Assessing Officer.

Final Conclusion: The appeal succeeded on the book-profit issue and was restored on the section 14A issue, resulting in overall relief to the assessee with further examination directed on the disallowance computation.

Ratio Decidendi: For computing book profit under section 115JB, the profit and loss account must be read with the notes to accounts, and a receipt that is not taxable as income under the Act cannot be brought into book profit unless the statute expressly permits such inclusion.

---