Book profit under MAT must include fixed asset sale gains through the profit and loss account, not direct reserves credit.

Profit on sale of fixed assets cannot be taken directly to reserves and surplus when computing book profit under section 115JB; it must first be routed through the profit and loss account prepared in accordance with the prescribed accounting framework. The MAT computation starts with the correctly drawn profit and loss account, and a company cannot bypass that statement by straightaway crediting sale gains to reserves. Applying the special MAT provisions strictly, the Court held that the assessee's accounting treatment was impermissible and that the transfer had to be reflected through the profit and loss account before book profit is determined.

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Issues: Whether the profit on sale of fixed assets could be credited directly to reserves and surplus in the balance sheet, or had to be routed through the profit and loss account for computation of book profit under section 115JB of the Income-tax Act, 1961.

Analysis: The assessees sold fixed assets during the relevant assessment year and credited the sale surplus directly to reserves and surplus without routing it through the profit and loss account. The statutory auditor noted that this accounting treatment deviated from the prescribed accounting framework and understated the year's profit. For the purpose of section 115JB of the Income-tax Act, 1961, book profit is the net profit shown in the profit and loss account prepared in accordance with Parts II and III of Schedule VI to the Companies Act, 1956. The Court held that a company cannot bypass the profit and loss account by straightaway transferring sale proceeds or gains from fixed assets to reserves, because the MAT computation must begin with the correctly prepared profit and loss account. The ruling was supported by the interpretation of the special MAT provisions and the principle that the deeming provision must be applied strictly.

Conclusion: The profit on sale of fixed assets had to be routed through the profit and loss account for arriving at book profit under section 115JB, and the assessee's direct credit to reserves and surplus was impermissible.

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