TaxTMI 
TaxTMI 
2009 (5) TMI 131
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.... compute book profit within the meaning of s. 115JB of the Act with a view to charge tax on book profit. The AO computed the book profit/total income under s. 115JB as under: "Income under s. 115JB Net profit as per P&L a/c - 77,81,868 Dividend income under s. 10(33) - 1,34,770 ---------- 76,47,098 ---------- Rounded off - 76,47,100" &nb....
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....nder s. 115JB of the Act. He placed strong reliance upon the decision of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT (2002) 174 CTR (SC) 521 : (2002) 255 ITR 273 (SC). 8. We have heard both the parties and have gone through the orders of the authorities below. 9. The question that arises for consideration is as to whether any income exempted under the normal provisions of the Act but not so provided in the Expln. (1) to s. 115JB, is to be excluded from the net profit shown in the P&L a/c prepared by the assessee under Parts II and III of Sch. VI of Companies Act, which were laid before the annual general meeting of the company, while computing book profit in terms of s. 115JB of the Act. 10. We have carefully perused the provisions contained in s. 115JB of the Act, and from perusal thereof, it is evident that s. 115JB of the Act is a deeming provision and refers to "special provision for payment of tax by certain companies". It has an overriding effect upon other provisions of the Act. It is applicable only in the case of a company. As per s. 115JB, the AO has to find out the normal tax liability as computed as per the normal provisions of the Act ignori....
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.... to be reduced as specified in cls. (i) to (vii) of the Explanation to determine the "book profit". The method of determining of "book profit" under s. 115JB is a self-contained code as so provided in the Explanation thereto. The scheme of s. 115JB is to adopt the P&L a/c of the assessee prepared in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act and to treat the net profit shown therein as book profit after making certain adjustments specifically provided in Explanation thereto. The permissible adjustments in the form of additions and deductions are provided under Explanation to s. 115JB. No deductions, rebates or allowances other than what is stated in the Explanation are available for computation of book profit. It is very clear from the non obstante clause in s. 115JB that the assessment under s. 115JB overrides other provisions of Act in respect of the provisions specifically provided in s. 115JB of the Act. In fact, the AO gets jurisdiction to make assessment under s. 115JB only when the income-tax payable on the total income as computed under the normal provisions of the Act is less than specified percentage of book profit as contemplated u....
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....xplanation. The use of the words "in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act" in s. 115J was made for the limited purpose of empowering the AO to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the AO has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinized and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the RoC who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-s. (1A) of s. 115J does not empower the AO to embark upon a fresh enquiry in regard to the entries made in the books of account of the company." 13.1 On reading the aforesaid decision of the Hon'ble Supreme Court, it is clear that the AO does not have jurisdiction to go behind the net profits shown in the P&L a/c except to the extent provided in the Explanation. It has....
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....that while preparing P&L a/c, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the P&L a/c laid before the company at its annual general meeting in accordance with the provisions of s. 210 of the Companies Act, 1956 (1 of 1956): Provided further that where a company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under the Act, the method and rates for calculation of depreciation shall correspond to the method and rates which have been adopted for calculating the depreciation for such financial year or part of such financial year falling within the relevant previous year. Explanation-For the purposes of this section, 'book profit' means the net profit as shown in the P&L a/c for the relevant previous year prepared under sub-s. (2), as increased by- (a) and (b) ............. (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (d) to (f) ............. if any amount referred to in cls. (a) to (f) is debited to the P&L a/c, ....
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.... AO has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinized and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the RoC who has a statutory obligation also to examine and. be satisfied, that the accounts of the company are maintained, in accordance with the requirements of the Companies Act. Sub-s. (1A) of s. 115J does not empower the AO to embark upon a fresh enquiry in regard to the entries made in the books of account of the company. ' From the above, it is evident that the AO has to accept the authenticity of the accounts maintained in accordance with the provisions of Part II and Part III of Sch. VI to the Companies Act, which are certified, by the auditors and pressed by the company in the general meeting. The AO has only the power of examining whether the books of account are duly certified by the authorities under the Companies Act and whether such books have been properly maintained in accordance with the Companies Act. The AO does not have the ju....
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....In the present case, the debt is the amount receivable by the assessee and not any liability payable by the assessee and, therefore, any provision made towards irrecoverability of the debt cannot be said to be a provision for liability. Therefore, in our view Item (c) of the Explanation is not attracted to the facts of the present case. In the circumstances, the AO was not justified in adding back the provision for doubtful debts of Rs. 92,15,187 under cl. (c) of the Explanation to s. 115JA of the 1961 Act. 9. For the aforestated reasons, there is no merit in this civil appeal and accordingly, the same is dismissed with no order as to costs." 15. From the aforesaid decisions of the Hon'ble Supreme Court, the following propositions, for the purpose of computing book profit under s. 115J or 115JA or 115JB, as the case may be, may be laid down: (a) The AO has to accept the authenticity of the accounts maintained in accordance with the provisions of Part II and Part III of Sch. VI to the Companies Act, which are certified by the auditors and laid before company in the animal general meeting. (b) The AO has only the power of examining whether the books of accounts are duly c....
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....long-term capital gain is included in the P&L a/c but it is not includible in the net profit in terms of provisions of Part II and Part III of Sch. VI to the Companies Act or the accounting principles accepted under the Companies Act. It is, thus, not a case of the assessee made out in the audited accounts that the long-term capital gain was not includible in the P&L a/c prepared in terms of Sch. VI to the Companies Act. In the computation of book profit under s. 115JB, the assessee claimed exclusion of long-term capital gain amounting to Rs. 40,57,545 under s. 54EC of the Act as the assessee deposited an amount of Rs. 41,00,000 in specified schemes contemplated under s. 54EC of the Act. The assessee, thus, claimed deduction of long-term capital gain from book profit by virtue of investment in specified schemes contemplated under s. 54EC of the Act and not because of the reason that the same was not includible in P&L a/c prepared under Part II and Part III of Sch. VI to the Companies Act. It is pertinent to note here that the assessee has not made any claim of deduction of capital gain (short-term) from the book profit, which goes to show that capital gain as such is not deductible....
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....that the expression "save as otherwise provided in this s. 115JB" clearly means that what is provided in s. 115JB should be religiously followed and anything over and above the matter provided in s. 115JB will be subject to other provisions of the Act. The provisions of s. 115JB has an overriding effect upon other provisions of the Act as is evident from the section itself. The method of computation of book profit provided in Explanation to s. 115JB, should, thus, be followed while computing the book profit, and the normal provisions of computation of profit under any head of the Act shall not be applicable. By no stretch of imagination can it be construed as substituting the other provisions of the Act in place of what is specifically made available in s. 115JB insofar as the computation of book profit under s. 115JB is concerned. The entire mechanism for the computation of book profit is clearly set out in sub-s. (1) of s. 115JB read with Explanation thereto. Not only starting point being the net profit as shown in the P&L a/c prepared in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act but also the items, which are to be increased as stipulated ....
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....the provisions of Parts II and III of Sch. VI to the Companies Act and laid before the company in its annual general meeting, for the purpose of computing "book profit" under s. 115JB, it would certainly be against the above referred decisions laid down by the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT and CIT vs. HCL Comnet Systems & Services Ltd. wherein the powers of the AO while computing the book profits for the purpose of s. 115J or 115JA, were examined and analyzed. 21. The learned counsel for the assessee has further contended that the amount of net profit as shown in the P&L a/c, for the purpose of computing "book profit" under s. 115JB, can be tinkered with and thus, the figures of profit/loss shown in the P&L a/c is not sacrosanct and it is not as if the same cannot be varied even if the same is not permitted by the items mentioned in the Explanation to s. 115JB of the Act. In support of this contention, the decision of Hon'ble Delhi High Court in the case of CIT vs. Sain Processing & Weaving Mills (P) Ltd. (ITA No. 1128 of 2007, dt. 17th Dec., 2008) since reported in (2009) 17 DTR (Del) 215 was relied upon. 22. We have carefully gone through th....
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....ms were shown separately after the figure of net profit had been struck down in the P&L a/c did not mean that they would not constitute part of the net profit. From the above decision, it is, thus, evident that the net profit as shown in the P&L a/c may be adjusted by the items shown separately or otherwise disclosed in the notes to the accounts as per requirement of the Companies Act, 1956 in as much as such disclosure or information given in the notes to the accounts as per requirement of the Companies Act would fall within the ambit of the expression "net profit" as shown in the P&L a/c. In other words, if the items required to be incorporated in the P&L a/c as per provisions of Companies Act are not shown in the P&L a/c before striking out net profit but are separately shown thereafter or are otherwise disclosed in the notes to the accounts as per requirement of Companies Act, the items so separately shown or disclosed in the accounts would form part of net profit shown in the P&L a/c prepared in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act, and the "book profit", for the purpose of s. 115J or 115JA or 115JB, as the case may be, shall be co....
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....ounts as per requirement of Companies Act read with Parts II and III of Sch. VI of the Companies Act, 1956, for the purpose of determining net profit as shown in the P&L a/c and, in turn, for the purpose of computing "book profit" under s. 115J or 115JA or 115JB, as the case may be. 23. We now come to the facts of the present case before us where the assessee has contended that the amount of capital gain available for deduction under s. 54EC is to be reduced from the net profit while computing "book profit" under s. 115JB of the Act. The assessee all along contended that the book profit under s. 115JB was to be computed after reducing the amount of capital gain deductible or exempted under s. 54EC of the Act from the net profit as shown in the P&L a/c. The assessee's counsel urged before us that the amount of capital gain invested in specified schemes in terms of s. 54EC and, thus, it becoming exempt should be excluded from the amount of net profit as shown in P&L a/c for the purpose of computing book profit under s. 115JB of the Act. From the facts of the present case and from the submissions of both the parties, it is clear that the claim of the assessee rests upon a footing t....
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....Bom) 96 : (2001) 249 ITR 597 (Bom), which was relied upon by the Department in the case of ITO vs. Frigsales (India) Ltd., is relevant and has important bearing to the controversy arising in the present case. In that case, the assessee filed its return of income declaring a net loss of Rs. 29,120. In that case, part of land was sold by the assessee and in the return of income, the assessee treated the income derived from the above sale of property as long-term capital gain and offered Rs. 2.70 lakhs for taxation but as per the P&L a/c for this year, the assessee earned a net profit of Rs. 12,76,119 but the assessee did not offer any income under s. 115J of the Act on the ground that under s. 115J, one has to take commercial profit and if any receipt has no commercial profit element, then such receipt would have to be excluded for the purposes of s. 115J. It was also the claim of the assessee that commercial profits or profits under s. 115J cannot include capital gains. In that case, the AO rejected this claim of the assessee. Learned CIT(A) also confirmed the assessment order but the Tribunal took the view that under the IT Act, 1961, capital gain is deemed to be income under s. 45....
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....er cl. 2 of Part II of Sch. VI to the Companies Act where a company receives the amount on account of surrender of leasehold rights, the company is bound to disclose in the P&L a/c the said amount as non-recurring transaction or a transaction of an exceptional nature irrespective of its nature, i.e., whether capital or revenue. That, it would be inappropriate to directly transfer such amount to capital reserve. Such receipts are also covered by cl. 2(b) of Part II of Sch. VI to the Companies Act which, inter alia states that the P&L a/c shall disclose every material feature, including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of an exception nature. Lastly, even under cl. 3 (xii)(b) profits or losses in respect of transactions not usually undertaken by the company or undertaken in circumstances of exceptional or non-recurring nature shows clearly that capital gains should be included for the purpose of computing book profits. That, capital gains would certainly be one of the various items whose information is required to be given to the shareholders under the said cl. 3(xii)(b). So also, the disclosure is required to be made....
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....that decision of the Tribunal has been reversed by Hon'ble Bombay High Court, and hence this decision of the Special Bench of the Tribunal rendered in the case of Sutlej Cotton Mills Ltd. is of no avail to the assessee. 27. In view of the above discussion, it is seen that the capital gain is a part of net profit to be prepared in accordance with the provisions of Part II and Part III of Sch. VI to the Companies Act. In the present case, the assessee itself has included the capital gain in the P&L a/c prepared under the Companies Act. The capital gain included in the net profit prepared under the Companies Act has been claimed as exempted for the reason that the assessee has invested the amount of capital gain in specified schemes within the specified time as per s. 54EC of the Act, and not because of the reason that it is not includible in the net profit prepared under the Companies Act. It is further not in dispute that the deduction available under s. 54EC is not covered under any of the items mentioned in the Explanation to s. 115JB of the Act. Therefore, in the light of the decision of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT and CIT vs. HCL Comnet Syst....
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....lause is now limited only to determine book profits and the book profits so determined have to be taxed taking into consideration the other provisions of the Act. In other words, the Tribunal held that s. 115JA is a part of the Act now and the exemption allowed by one provision of the Act cannot be taken away by another provision of the Act, and, thus, in that case, the Tribunal held that if the exemption allowed under s. 50 was taken away while taxing the book profits under s. 115JA, it would make the provision of s. 50 redundant. In this decision, a reference to the decision of Hon'ble Bombay High Court in the case of CIT vs. Veekaylal Investment Co. (P) Ltd. was made but the same was not discussed or deliberated upon or relied upon by the Tribunal by observing that this decision was rendered as per the provisions of s. 115J, which is self-contained code, though a new sub-s. (4) has been inserted first time in s. 115JA of the Act. From the above decision of the Tribunal, Mumbai Bench in the case of ITO vs. Frigsales (India) Ltd., it is clear that the Tribunal has upheld the order of the learned CIT(A) in excluding capital gain exempted under s. 50 of the Act from the book profit ....
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....ons of the Act cannot be applied while computing book profit under s. 115J or 115JA or 115JB, as the case may be. We do not find any difference between s. 115J or 115JA or 115JB insofar as method of computation of book profit as provided in Explanation appended thereto are concerned. The Tribunal in the case of ITO vs. Frigsales (India) Ltd. has not applied the ratio of decision of Hon'ble Supreme Court in the case. of Apollo Tyres Ltd. and Hon'ble Bombay High Court in the case of CIT vs. Veekaylal Investment Co. (P) Ltd. for the reason that these decisions were rendered in the context of provisions of s. 115J of the Act, but the fact remains that the propositions laid down by Hon'ble Supreme Court in the case of Apollo Tyres Ltd. have been reiterated and relied upon by the Hon'ble Supreme Court in the case of CIT vs. HCL Comnet Systems & Services Ltd. which has been rendered in the context of s. 115JA of the Act. Thus, in the light of the decision of Hon'ble Supreme Court in the case of CIT vs. HCL Comnet Systems & Services Ltd., the decision of Mumbai Tribunal in the ease of ITO vs. Frigsales (India) Ltd. making a distinction between ss. 115J and 115JA for the purpose of computin....
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.... not relevant for the purpose of computing book profit under s. 115JA of the Act, and the book profit under s. 115JA is to be computed only in accordance with the provisions contained in that section read with Explanation thereto. Thus, the view of the Tribunal, Mumbai Bench in the case of Frigsales (India) Ltd. that the normal provision of the Act shall apply while computing book profit under s. 115JA by virtue of sub-s. (4) thereof is against the decision of Hon'ble Supreme Court in the case of CIT vs. HCL Comnet Systems & Services Ltd., and is, thus, of no assistance to the assessee's case and needs no further consideration. 31. The learned counsel for the assessee has also placed reliance upon the decision of Tribunal, Mumbai Bench 'A' in the case of Karimjee (P) Ltd. vs. ITO (2007) 15 SOT 128 (Mumbai) and 14 other decisions of Tribunal referred to in said case of Karimjee (P) Ltd. vs. ITO to contend that book profit under s. 115JB cannot be increased by adding capital gain. In that case, the Tribunal has observed as under: "28. Copies of these orders have been compiled at pp. 1 to 58 of the paper book. We find that in these orders various High Courts and Supreme Court de....
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....ence to 'other provisions of this Act' clearly indicates that what is provided in s. 115JB should be religiously followed accordingly and anything over and above that will be subject to the other provisions of the Act. By no stretch of imagination can it be construed as substituting the other provisions of the Act in place of what is specifically made available in this section, insofar as the computation of book profit is concerned, the entire mechanism for its calculation is clearly set out in Expln. (1). Not only starting point being the net profit as shown in the P&L a/c but also all the amounts which are to be increased as stipulated in cls. (a) to (h) and those which are to be reduced as specified in cls. (i) to (vii) find separate mention in the scheme of the section itself. So the computation of 'book profit' is to be done strictly as per this Explanation and no assistance from any other section of the Act can be taken for that purpose. When cl. (iii) of Expln. (1) clearly states that, the amount of loss brought forward or unabsorbed depreciation, which is less as per books of account is liable to be reduced, in our considered opinion, there is no authority for falling upon ....
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.... is not profit includible in the P&L a/c prepared in terms of Sch. VI of the Companies Act. Since there is no provision in Chapter XII-B for deduction of capital gains in the computation of book profit, the assessee is not entitled, to the deduction claimed. The Bombay High Court in the decision in CIT vs. Veekaylal Investment Co. (P) Ltd. (2001) 166 CTR (Bom) 96 : (2001) 249 ITR 597 (Bom) also took the view that capital gain is part of profit which cannot be excluded in the computation of book profit. Even though learned senior counsel for the assessee contended that the case decided by the Bombay High Court did not involve claim of exemption on capital gains under s. 54E of the Act, we do not think this distinction makes any difference, because so long as long-term capital gains is part of profit included in the P&L a/c prepared under Chapter VI of the Companies Act, it cannot be excluded unless so provided Explanation to s. 115J(1A) of the Act. In the absence of any provision for exclusion of capital gains in the computation of book profit under the above provision, assessee is not entitled to the exclusion claimed. In other words, s. 54E has no application in the computation of....