Book Profit Computation under Section 115JB: capital receipts and section 14A disallowance excluded, leave encashment left open

The note explains that, for section 115JB book profit computation, only adjustments expressly authorised by the statutory Explanation can be made. Capital receipts such as industrial promotion assistance and sales tax incentive, being not income in character, were treated as excludable from MAT computation. It also states that section 14A disallowance cannot be sustained where no exempt dividend income was earned, and the same principle applies to book profit computation under section 115JB. On leave encashment, the matter was kept open for fresh consideration in light of the pending Supreme Court decision on section 43B(f).

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Issues: (i) Whether the disallowance relating to leave encashment required fresh consideration in view of the pending final decision of the Supreme Court. (ii) Whether industrial promotion assistance and sales tax incentive could be excluded while computing book profit under section 115JB. (iii) Whether disallowance under section 14A could be sustained in the absence of exempt dividend income, including for book profit computation under section 115JB.

Issue (i): Whether the disallowance relating to leave encashment required fresh consideration in view of the pending final decision of the Supreme Court.

Analysis: The issue was treated as covered by earlier orders in the assessee's own case. The matter turned on the treatment of leave encashment under the governing legal position pending final disposal by the Supreme Court on the validity and effect of section 43B(f). Consistent with the earlier coordinate bench view, the proper course was to restore the matter for fresh adjudication after the final decision of the Supreme Court.

Conclusion: The issue was remanded for fresh consideration and the assessee obtained relief to that extent.

Issue (ii): Whether industrial promotion assistance and sales tax incentive could be excluded while computing book profit under section 115JB.

Analysis: The receipts were held to be capital in nature and not income in the ordinary sense. The computation of book profit under section 115JB is a self-contained code, but its adjustments are confined to the items specifically permitted by the Explanation. The reasoning accepted that a receipt which is not in the nature of income cannot be brought into MAT merely because it stands credited in the profit and loss account, and that the object of MAT is to reach real profits, not to tax capital receipts lacking income character.

Conclusion: The exclusion was allowed and the assessee succeeded on this issue.

Issue (iii): Whether disallowance under section 14A could be sustained in the absence of exempt dividend income, including for book profit computation under section 115JB.

Analysis: The record showed that no exempt dividend income had been earned during the year. In such circumstances, no disallowance under section 14A was permissible. The same principle was applied to the MAT computation as well, because a notional disallowance under section 14A could not be imported into section 115JB in the absence of exempt income.

Conclusion: The disallowance was deleted both under the normal provisions and for section 115JB purposes, in favour of the assessee.

Final Conclusion: The appeal was disposed of with partial relief to the assessee, while the Revenue's grounds failed on the substantive additions challenged by it.

Ratio Decidendi: Under section 115JB, only the adjustments specifically authorised by the statutory Explanation can be made, and a receipt that is not income in character, or a disallowance under section 14A where no exempt income exists, cannot be added to book profit by implication.

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