2026 (4) TMI 128 - HC - Income Tax

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 ... Book profit under MAT u/s 115JB - Preparation of profit and loss account in accordance with Schedule VI - mechanism adopted by the Assessee/Appellant in computing its book profits - Capital profit on sale of fixed assets 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? - HELD THAT: - Part II of Schedule VI of the Companies Act, 1956, lays down the requirement for profit and loss account and in clause (2) it mandates the assessee to disclose every material feature including credits or receipts and debits of expenses in respect of non recurring transactions or transaction of an exceptional nature. Clause xi (a) mandates the amount of income from investments, distinguishing between trade investments and other investments must be disclosed. In the financial statement of the assessee, we find in the cash flow statement the receipt of sale of fixed asset is shown under cash from investment activities however had not brought it in the profit and loss account as it is required under part II of the Schedule VI to the Income Tax Act. The deviation from the accounting policy for under statement of profit is noted and recorded by the Statutory Auditor however, no justifiable reasoning placed by assessee for the said deviation. The decision of the Hon'ble Supreme Court in M/s Dynamics Orthopaedics (P) Ltd. Case [2010 (2) TMI 8 - SUPREME COURT] has clearly held that Assessee Companies has to necessarily prepare its profit and loss Account only in terms of Part II and Part III of Schedule VI in the Companies Act and being a deeming fiction, there cannot be any liberal interpretation to the Section 115J. As rightly contented by the Learned Senior Standing Counsel for the Department, this point of law has reached finality and this is not the point of reference to the larger bench. Thus, we hold, the capital profit on the sale of the Fixed Assets of the Company cannot be taken directly to the Reserves & Surplus in the Balance Sheet and the same has to be routed through the Profit & Loss Account to arrive at the correct book profits under Section 115JB of the Act and it is absolutely right in law to rework the profits u/s 115JB of the Act and assess the tax on the ground that the profit on the sale of Fixed Assets credited to the capital reserve by the Appellant are to be treated as normal profit for arriving at book profits u/s 115 JB. Final Conclusion: Assessee appeal dismissed. The Court held that, for Assessment Year 2010-2011, the profit on sale of the assessee's fixed assets had to be routed through the profit and loss account and included in book profit for the purposes of section 115JB. 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.