AI Drafter 
TaxTMI 
TaxTMI 
2015 (8) TMI 979
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....habilitation of buildings under Slum Rehabilitation Scheme. The assessee company was formed on 24.3.2008 by converting an earlier partnership firm into a company under the provisions of PART-IX of the Companies Act, 1956. The assessee company also owns a wholly owned Indian subsidiary company named "SVI Realtors Private Limited". The assessee company held a parcel of land admeasuring about 61,506/-sq. Mtr., as its capital asset and the said land was attached with development rights/FSI. The assessee transferred development rights/FSI of 55,464.04 sq. Mtr which was available on a portion of above said land, i. E., on a land admeasuring 19,423 sq. Mts (out of 61506 sq. Mt) to its wholly owned Indian subsidiary company viz., SVI Realtors Pvt Ltd (referred above). The above said transfer generated Long Term Capital Gain (LTCG) of 300.68 crores. The assessee disclosed the same as "Extra Ordinary Income" in the profit and loss account. Under the provisions of sec. 47(iv) of the Act, the transfer of a capital asset by a company to its wholly owned Indian subsidiary company (subject to certain conditions) is not regarded as "transfer" and hence the Capital gain arising on such transfer is ....
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....he assessee submitted that the decision rendered by the Special Bench of Tribunal in the case of Rain Commodities Ltd (supra) is not applicable to the facts prevailing in the instant case. The Ld A. R submitted that the Special bench has specifically observed that the capital gains arising in the hands of assessee therein has been included in the profit and loss account and it has further been accepted that the accounts have been prepared in accordance with the provisions of Part II and Part III of Schedule VI to the Companies Act. He submitted that the Special bench has specifically observed that the assessee before it did not clarify anything about the same in the Notes to accounts. He submitted that the Special bench, based on the above said facts, held that the profit arising on transfer of capital assets to a wholly owned Indian subsidiary company cannot be excluded while computing book profit. In this regard, the Ld A. R invited our attention to the following observations made by the Special bench in paragraph 24 of its order:- "24. It is undisputed fact that the long term capital gain earned by the assessee is included in the net profit determined as per profit and loss a....
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.... same should be excluded from net profit for the purpose of computing book profit u/s 115JB of the Act. 7. The ld. Counsel submitted that the assessee herein has taken a specific stand that the impugned profit is not includible in the net profit for the purposes of sec. 115JB of the Act and accordingly attached a specific note in the "Notes to accounts" clearly stating that the gains arising on transfer of assets to the subsidiary company is not includible in the book profit and further the said interpretation is supported by the opinion of experts. The ld. Counsel accordingly submitted that the accounts prepared by the assessee is subject to the qualification made in the Notes on accounts and hence the decision rendered by the Special Bench in the Rain Commodities Ltd (supra) is not applicable to the facts of present case. 8. The ld. Counsel further submitted that the Notes forming the part of accounts should also be read along with the profit and loss account and hence expression "net profit as shown in the profit and loss account" used in the section 115JB is required to be understood by giving due effect to the items stated in Notes to accounts accompanying annual account....
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.... do not provide for the exclusion of gain arising on transfer of asset to its subsidiary. He submitted that the identical issue was considered by the Special bench in the case of Rain Commodities Ltd (supra) and the Special bench of Tribunal has held that such kind of profit cannot be excluded while computing "Book Profit". Accordingly he submitted that the facts prevailing in the instant case and the case considered by the Special bench are identical in nature and hence the decision rendered by the Special bench shall be squarely applicable to the facts of present case. Accordingly, he submitted that the Ld CIT(A) was justified in upholding the order of the AO on this issue. 11. We have heard rival contentions and perused the record. There is no dispute that the profit arising on transfer of a capital asset by the assessee to its wholly owned Indian subsidiary company was not assessed as "Capital Gain" while computing total income under normal provisions of the Act. The contention of the assessee is that the same is also required to be excluded while computing "Book Profit" u/s 115JB of the Act for the reasons cited by it. The contention of the revenue is that the provisions of....
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....ed fact that the assessee has attached a note in the Notes forming part of accounts explaining therein that the profits arising on transfer of capital asset to its subsidiary company is, in its opinion, not coming within the purview of sec. 115JB of the Act. It is contended that the Profit and loss account should be read along with the Notes forming part of accounts and the net profit should be understood as the net profit shown in the profit and loss account as adjusted by the notes given in the Notes to the accounts. In this regard, the assessee has placed reliance on the decision rendered by the Hon'ble Delhi High Court in the case of Sain Processing & Weaving Mills (P) Ltd (supra). In the case before Hon'ble Delhi High Court, the assessee therein issue did not charge depreciation to the Profit & Loss account, but disclosed the same in the Notes forming part of accounts. However, while computing book profit u/s 115J of the Act, it claimed the amount of depreciation as deduction from the Net profit disclosed in the Profit and loss account. The Hon'ble High Court considered the aforesaid aspect of the controversy in the following words:- "The answer to this poser is found in su....
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....though it disclosed the details of waiver in the notes on accounts. The assessing officer noticed that the assessee would be liable to pay tax as per the provisions of Section 115JA of the Act, (Minimum Alternative tax), if the waiver benefits are incorporated in the books of accounts accordingly he included the waiver benefits in the book profit. The Tribunal, after considering the decision of Hon'ble Delhi High Court in the case of CIT Vs. Sain Processing Mills (P) Ltd. (2010)(325 ITR 565), held that the Assessing Officer is entitled to include the waiver benefit that was disclosed in the notes on accounts. 17. We shall now examine about the ratio of all the above said decisions vis-à-vis sec. 115JB of the Act. Since the term "Book Profit" is defined in Explanation-1 to sec. 115JB, we need to refer the same, which starts with the following expression:- " For the purposes of this section, "book profit" means the net profit as shown in the Profit and Loss account for the relevant previous year prepared under sub-section (2), as increased by----" In sec. 115JB(2), it is provided that the profit and loss account shall be prepared in accordance with the provisions of p....
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....ven in the Notes forming part of accounts have to be read along with the Profit and Loss account, meaning thereby the items having effect over the Net profit shown in the Profit and Loss account, but otherwise disclosed in the Notes to accounts should be adjusted to the said Net profit. Such kind of adjustment is held to be falling "within the ambit of the expression 'shown' in the profit and loss account". The ratio of these decisions is that the expression "net profit as shown in the profit and loss account" should not be understood as the net profit disclosed in the profit and loss account, but the net profit adjusted to the effects of notes given in the Notes forming part of accounts. Hence the Court as well as Tribunals, in the above cited cases, held that the depreciation, incremental liability on leave encashment, loan waiver benefits have to be adjusted to the profit/loss shown in the Profit and loss account, which means that the "Net profit shown in the profit and loss account" is the figure arrived at after making such kind of adjustments. From these discussions, it follows that, for the purpose of making such kind of adjustments, it is not necessary that those items shou....
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....f accounts. The Ld Counsel sought to distinguish the decision rendered by the Special bench by submitting that the assessee herein has furnished a note with regard to the profit arising on transfer of a capital asset to the wholly owned Indian subsidiary company. The Special bench was also conscious of the fact that the notes given in the Notes forming part of accounts might alter the net profit shown in the profit and loss account. The following observations made by the Special bench in paragraph 18 of the order also clarify the above said view:- "18......... We agree that it is settled law that Assessing Officer has the power to alternate (sic. alter) the net profit. In the following two cases, the Assessing officer can rewrite the profit and loss account, i. E., to say that Assessing Officer should recalculate the net profit and then follow the adjustments of MAT as usual.... In view of the foregoing discussions, we find merit in the submission of the assessee that the facts prevailing in the instant case is distinguishable from the facts of the case before the Special bench. 22. At this stage, we feel it relevant to discuss about a decision rendered by the co-ordinate ....
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.... be accepted by the assessing officer and he is empowered to make only those adjustments which are prescribed in the Explanation 1 to sec. 115JB of the Act. 23. We shall now examine the second contention urged by the assessee, viz., since the profit arising on transfer of a capital asset by a company to its wholly owned subsidiary company is not treated as income" u/s 2(24) of the Act and since it does not enter into computation provision at all under the normal provisions of the Act, the same should not be considered for the purpose of computing book profit u/s 115JB of the Act. In order to appreciate the contentions of the assessee, we feel it pertinent to extract the relevant provisions here. The provisions of sec. 2(24) of the Act defines the term "income" and under clause (vi), the capital gains is included in the definition. For the sake of convenience, we extract below the said definition:- "2(24) "income" includes - (vi) any capital gains chargeable under section 45". The provisions of sec. 45 of the Act reads as under:- "45 (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in....
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....ng on a transfer of a capital asset into taxation u/s 45 of the Act. Accordingly, in the absence of "transfer", the profits and gains arising on said transfer of capital asset by a company to its wholly owned subsidiary is not chargeable to tax u/s 45 of the Act. If the said profits and gains is not chargeable to tax u/s 45 of the Act, the same would not be considered as "income" at all under the definition of income given in sec. 2(24) of the Act. 25. In view of the above said legal provisions, the assessee has contended that the profits and gains arising on transfer of a capital asset by a company to its subsidiary company does not fall under the definition of "Income" as given in sec. 2(24) of the Act and hence it does not enter into the computation provisions of the Income tax Act. Accordingly it was contended that, an item of receipt which is not considered as "income" at all and which does not enter into the computation provisions of the Income tax Act, cannot be subjected to tax u/s 115JB of the also. 26. We shall now examine the scheme of the provisions of sec. 115JB of the Act. It is pertinent to note that the provisions of sec. 10 lists out various types of income, ....
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....fer" and hence under the definition of "Capital gains chargeable u/s 45" and consequently, the same does not fall within the purview of the definition of "income" given u/s 2(24) of the Act. Further, we notice that the Special bench did not have occasion to consider the argument urged before us that the profits and gains arising on transfer of a capital asset by a holding company to its wholly owned Indian Company does not fall under the definition of "income" at all u/s 2(24) of the Act and hence the same does not enter into the computation provisions of the Act at all. We are impressed by the arguments advanced in this regard and we have also extensively dealt with the relevant provisions and also about the scheme of the provisions of sec. 115JB of the Act. We are of the view that the said contentions distinguish the decision rendered by the Special Bench in the case of Rain Commodities (supra). On merits also, we have earlier seen that the assessee herein has attached a note in the notes forming part of accounts and in the case before the Special bench, no such notes has been inserted, which fact was specifically noted by the Special bench. Hence on this factual aspect also, the....