2026 (3) TMI 1285 - HC - Income Tax

Section 115JB book profit adjustments are confined to the Explanation, with the Revenue appeal admitted on limited issues.

For computation of book profit under Section 115JB, additions made by the Assessing Officer are confined to items expressly covered by the Explanation, ... Taxability of a State capital investment subsidy received by the Respondent from West Bengal Industrial Development Corporation Ltd. in terms of the 'West Bengal Incentive Scheme 1993' - MAT computation - Addition of corporate tax paid in Saudi Arabia whilst computing book profit under Section 115JB - Deductibility of the expenditure incurred on construction of Jukehi Road at Kymore which belonged to the Government of Madhya Pradesh - Addition of corporate tax paid in Saudi Arabia whilst computing book profit under Section 115JB - Exclude sales tax subsidy/exemption received during the year and included the sales turnover and from the book profit - Computation of long term capital gains in respect of sale of lands at Kaza mines and Nimabur at Kaza South - Addition in respect of provision for bad and doubtful debts in computing the book profits under section 115JB - Addition of deferred revenue expenditure - Addition in respect of provision for bad and doubtful debts in computing the book profits under section 115JB - Addition made in respect of revenue generated from a trial run production in computing book profit under section 115JB - Addition on account of foreign exchange, capital subsidy received towards purchase of assets and state capital investment received from W.B.I.D.C. for computation of Book profit u/s 115JB - Provision for wealth tax in computing book profits u/s 115JB - Provision for additional gratuity in computing book profits under section 115JB - Exclusion of write back of excess provisions made in earlier years in computing book profits under Section 115JB. Addition made in respect of withdrawal from the Share Premium Account in computation of the book profits - HELD THAT:- According to the Commissioner of Income-tax (Appeals) write back of Share Premium Account was an allowable deduction in view of clause (i) of Explanation to Section 115JB(2). Commissioner of Income-tax (Appeals) deleted the addition following the decision of the Tribunal for Assessment Year 1990-91 as well as the orders of his predecessor for Assessment Years 1997-98 and 1998-99. The Tribunal upheld the order of the Commissioner of Income-tax (Appeals) following its order in the Appellant’s own case for the Assessment Years 1990-91 and 1998-99. Taxability of a State capital investment subsidy - Revenue or capital expenditure - HELD THAT: - Commissioner of Income-tax (Appeals) held it to be a capital receipt as it was received as an incentive for industrialisation. The Commissioner of Income-tax (Appeals) deleted the addition by placing reliance on the decisions in CIT v. P.J. Chemicals Ltd. [1994 (9) TMI 1 - SUPREME COURT], DCIT v. Reliance Industries Ltd. [2003 (10) TMI 255 - ITAT BOMBAY-J] The Tribunal declined to interfere with the order of the Commissioner of Income-tax (Appeals). Before us, both the parties are ad idem that this issue is no more res integra in view of the decision of this Court in Bajaj Auto Ltd [2025 (7) TMI 323 - BOMBAY HIGH COURT] and thus does not give rise to any substantial question of law. Addition of corporate tax paid in Saudi Arabia whilst computing book profit under Section 115JB - According to the AO the Respondent ought to have offered the gross receipts/ income and therefore added the said amount expended as receipt in computing the book profits under Section 115JB - HELD THAT:- The Apex Court in Apollo Tyres Ltd v CIT [2002 (5) TMI 5 - SUPREME COURT] has held that the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to Section 115J of the Act. The provisions of Section 115J, which the Supreme Court was considering, are pari materia to Section 115JB reproduced by us above. In these circumstances, the Tribunal has correctly followed the decision of the Apex Court to hold that the Corporate Tax paid in Saudi Arabia does fall in any of the clauses of Explanation 1. Before us, Appellant, was unable to distinguish as to how the ratio of the aforesaid decision of the Apex Court in Apollo Tyres Ltd v CIT (supra) would not apply to the facts of the present case. Thus, this issue also does not give rise to any substantial question of law. Deductibility of the expenditure incurred on construction of Jukehi Road at Kymore which belonged to the Government of Madhya Pradesh - revenue or capital expenditure - HELD THAT:- Commissioner of Income-tax (Appeals) deleted the addition holding that the expenditure did not result in creation of any asset of an enduring nature to the Appellant since the ownership vests with the Government of Madhya Pradesh. He further directed the Assessing Officer to withdraw the depreciation of 5% allowed by him. The Commissioner of Income tax (Appeals) followed the decision of Associated Cement Companies Ltd. [1988 (5) TMI 2 - SUPREME COURT] and the appellate orders in the Appellant’s own case for other assessment years. The Tribunal after noting the facts the decisions of the Apex Court in Associated Cement Companies Ltd. [1988 (5) TMI 2 - SUPREME COURT] and in L. H. Sugar Factory and Oil Mills (P) Ltd [1980 (8) TMI 1 - SUPREME COURT] declined to interfere with order of the Commissioner of Income-tax (Appeals). We find that the Commissioner of Income-tax (Appeals) and the Tribunal by concurrent orders deleted the addition that the Appellant was not the owner of the asset and that the expenditure had been incurred to facilitate smooth conduct of the business. Also, the Apex Court in the Appellant’s own case (Associated Cement Companies Ltd. (supra)) for the Assessment Year 1959-60 in respect of a similar expenditure at Shahabad had allowed the same as revenue expenditure. Exclude sales tax subsidy/exemption received during the year and included the sales turnover and from the book profit - HELD THAT:- Both the parties agree that the question as to the inclusion of the sales tax subsidy in computing the book profits have been admitted in the Appellant’s own case for the Assessment Year 2002-03 by this Court in [2019 (3) TMI 399 - BOMBAY HIGH COURT] However, the inclusion of the same in computing total income under the normal provisions would not arise in view of what has been held in paragraph 3 hereinabove. The appeal is therefore admitted on the following reframed question of law:- “Whether, on the facts and in the circumstances of the case and in law, the Hon'ble ITAT was right in upholding the decision of the Ld. CIT(A) deleting the disallowance on account of Sales Tax subsidy in computation of Book Profit under Section 115JB of the Act?” Computation of long term capital gains in respect of sale of lands at Kaza mines and Nimabur at Kaza South - HELD THAT:- Commissioner of Income-tax (Appeals) therefore directed the Assessing Officer to recompute the long term capital gain on sale of land by considering the fair market value as on 01-04-1981 as well as the indexed cost of improvement as submitted by the Appellant after verification of the correctness of the facts as well as the registered valuer's report. The Tribunal agreed with the Commissioner of Income-tax (Appeals) that the Appellant was entitled to deduct the cost of acquisition in computing the capital gains. These are all findings of facts. We fail to see that how does a question of law arise from this issue. The same is therefore not entertained. Addition in respect of provision for bad and doubtful debts in computing the book profits under section 115JB - HELD THAT:- Tribunal declined to interfere with the order of the Commissioner of Income-tax (Appeals). Before us, both the parties agree that the question as to the inclusion of the provision for bad and doubtful debts in computing the book profits under section 115JB of the Act have been admitted in the Appellant’s own case for Assessment Year 2002-03 in Income Tax Appeal No.1658 of 2016 vide order dated 4th March, 2019. The appeal is therefore admitted on the aforesaid question of law. Addition of deferred revenue expenditure - Commissioner of Income-tax (Appeals) deleted the addition by following the decision of Apollo Tyres [2002 (5) TMI 5 - SUPREME COURT] holding that it does not fall in any of the clauses of Explanation to section 115JB - HELD THAT:- Tribunal confirmed the order of the Commissioner of Income tax (Appeals). Before us, Shri Suresh Kumar, Appellant was unable to distinguish as to how the ratio of the aforesaid decision of the Apex Court in Apollo Tyres Ltd v CIT (supra) would not apply to the facts of the present case. As such, the said question does not give rise to any substantial question of law. Addition made in respect of revenue generated from a trial run production in computing book profit under section 115JB - HELD THAT:- Before us, both the parties agree that the question as to the inclusion of revenue generated from a trial run production in computing book profit under section 115JB of the Act has been admitted in the Appellant’s own case for Assessment Year 2002- 03 [2019 (3) TMI 399 - BOMBAY HIGH COURT] Addition on account of foreign exchange, capital subsidy received towards purchase of assets and state capital investment received from W.B.I.D.C. for computation of Book profit u/s 115JB - HELD THAT:- State Capital Investment Subsidy received from WBIDC constituted capital receipt in the hands of the appellant, hence, not taxable and therefore the same could not be added back in computing book profit under Section 115JB of the Act. Tribunal agreed with the findings of the Commissioner of Income-tax (Appeals). As the question deletion of the of addition of sales tax subsidy in computing the book profits under Section 115JB is admitted for the reasons set out in paragraphs 9 and 10 hereinabove [reframed question (iv)], the appeal is admitted on the aforesaid question of law also. Provision for wealth tax in computing book profits u/s 115JB - Section 115JB of the Act as it was applicable for the year under consideration is reproduced at paragraph 5 hereinabove. In this provision also under the said clause (a) of the Explanation, payment of wealth-tax is not contemplated. No substantial question of law can therefore be said to arise on this issue. Provision for additional gratuity in computing book profits under section 115JB - Tribunal confirmed the order of the Commissioner of Income-tax (Appeals) following its order in the Appellant’s own case for the Assessment Year 2002-03. The Appellant points out that this is a recurring issue since Assessment Year 1990-91 and that the Department has not filed any appeals for the past years. Further, this issue has been considered by this Court in CIT v Echjay Forgings (P) Ltd [2001 (2) TMI 56 - BOMBAY HIGH COURT] the relevant paragraph of which is reproduced below- “(III) Whether the net profit was required to be increased by an amount of Rs. 5,00,000 being the provision for gratuity - 8. As stated above, no reasons have been given by the Assessing Officer for adding the said amount to the net profit. The assessee has made the provision for gratuity on the basis of actuarial calculations. Hence, it cannot be said that the provision for gratuity is not an ascertained liability.” In that view of the matter no substantial question of law can said to arise on this issue. Exclusion of write back of excess provisions made in earlier years in computing book profits under Section 115JB - No fault can be found in the concurrent findings given by the Commissioner of Income-tax (Appeals) and the Tribunal as the reserve was created before 1st day of April, 1997. Hence, no substantial question of law can be said to arise on this issue. Addition made in respect of withdrawal from the Share Premium Account in computation of the book profits - HELD THAT:- According to the Commissioner of Income-tax (Appeals) write back of Share Premium Account was an allowable deduction in view of clause (i) of Explanation to Section 115JB(2). Commissioner of Income-tax (Appeals) deleted the addition following the decision of the Tribunal for Assessment Year 1990-91 as well as the orders of his predecessor for Assessment Years 1997-98 and 1998-99. The Tribunal upheld the order of the Commissioner of Income-tax (Appeals) following its order in the Appellant’s own case for the Assessment Years 1990-91 and 1998-99. Final Conclusion: The High Court admitted the appeal on the four specified questions relating to computation of book profit under Section 115JB (questions (iv) as reframed, (vi), (ix) and (x)) for Assessment Year 2003-04 and directed that these issues be heard along with Income Tax Appeal No.1658 of 2016 for Assessment Year 2002-03. Issues: (i) Whether the Tribunal was right in upholding deletion of disallowance of sales tax subsidy in computation of book profit under Section 115JB; (ii) Whether the Tribunal was right in deleting the addition of provision for bad and doubtful debts in computing book profit under Section 115JB; (iii) Whether the Tribunal was right in deleting the addition of revenue from trial run production in computing book profit under Section 115JB; (iv) Whether the Tribunal was right in deleting the addition of foreign exchange gain, capital subsidy and state capital investment received for computation of book profit under Section 115JB.Issue (i): Whether sales tax subsidy received should be disallowed and added back in computing book profit under Section 115JB.Analysis: The Court examined the orders of the CIT(A) and Tribunal which relied on precedent and the appellant's own earlier decisions. The Court noted prior admissions in the appellant's own case and relevant authorities interpreting inclusion under the Explanation to Section 115JB, and reframed the question to focus on exclusion of sales tax subsidy in computation of book profit.Conclusion: The appeal is admitted on this reframed question and will proceed for hearing (issue admitted for determination).Issue (ii): Whether provisions for bad and doubtful debts must be added to book profit under Section 115JB.Analysis: The Court noted the concurrent orders of the CIT(A) and Tribunal deleting the addition, the similarity with the appellant's own earlier years where this question was admitted, and relevant authorities on the scope of Explanation to Section 115JB concerning provisions for liabilities.Conclusion: The appeal is admitted on this question and will proceed for hearing (issue admitted for determination).Issue (iii): Whether revenue from trial run production should be included in book profit under Section 115JB.Analysis: The Court recorded that the CIT(A) and Tribunal treated the trial run receipts following the Guidance Note on Treatment of Expenditure during Construction Period and authoritative decisions distinguishing commercial profit from assessable income; the issue had been admitted in the appellant's own earlier matter.Conclusion: The appeal is admitted on this question and will proceed for hearing (issue admitted for determination).Issue (iv): Whether foreign exchange gain, capital subsidy and state capital investment receipts are to be added back in computing book profit under Section 115JB.Analysis: The Court noted the CIT(A) and Tribunal findings that foreign exchange gains and capital subsidies had been adjusted to asset cost under Section 43A and Explanation 10 to Section 43(1) and that state capital investment subsidies constituted capital receipts; it also linked the sales tax subsidy admission and treated the question as admitted for determination.Conclusion: The appeal is admitted on this question and will proceed for hearing (issue admitted for determination).Final Conclusion: The High Court has admitted the Revenue appeal only on the limited questions (reframed question on sales tax subsidy in computation of book profit under Section 115JB; inclusion of provision for bad and doubtful debts; inclusion of trial run production revenue; and inclusion of foreign exchange gains, capital subsidy and state capital investment receipts) and declined to admit other questions for substantial question of law; the admitted issues will be heard together with connected Income Tax Appeal No.1658 of 2016 (Assessment Year 2002-03).Ratio Decidendi: For the purposes of Section 115JB of the Income-tax Act, 1961, additions to book profit by the Assessing Officer are confined to items specified in the Explanation to the section and the Assessing Officer cannot go behind the net profit as shown in the profit and loss account except to the limited extent provided in that Explanation.