Capital gains cannot be considered while calculating book profit for Section 115JB

Pr. CIT Vs. Bhagwan Industries Limited
(ITA No. 436 of 2015,18^th July, 2017)

THE BOMBAY HIGH COURT HELD THAT- Capital Gain credited to Capital Reserve Account instead of Profit & Loss Account cannot be considered while computing Book Profit for the provision of Section 115JB (MAT).

BRIEF FACTS

1. During the Assessment Year 2004-05 , the assessee earned Capital Gain of Rs. 2.85 Crores on sale of land , which was directly to Capital Reserve Account in the Balance Sheet rather that routing it through Profit and Loss Account in the manner as may be provided under Part II and Part III of the Schedule VI of the Companies Act, 1956.
2. The assessee replied that as per the provisions of section 45, no capital gain tax was payable. Since the proceeds of the land are not available for the distribution of dividend, the same was not credited to the P&L account but taken directly to the capital reserve account. The P&L account was prepared by the company in accordance with the provisions of parts II & III of schedule VI to the Companies Act, 1956 and is audited under the Companies Act.
3. The AO during assessment proceedings found that the assessee has violated provisions of Part II of Schedule VI of the Companies Act by directly crediting Capital Gain in Capital Reserves Account in the Balance Sheet, instead of routing the same through P& L Account. The act of assessee was in contravention of applicable accounting standards and the provisions of the Companies Act,1956 dealing with the preparation and presentation of Financial Statements.
4. The AO has added the Capital Gain received while calculating book profit for the purposes of Section 115JB of the Income Tax Act, 1961.
5. The CIT(A) reversed the order of the AO citing that AO has not jurisdiction to go beyond the Net Profit shown in the P & L Account of the company except to the extent provided in the Explanation to the provisions of Section 115JB.
6. The Tribunal has also confirm the order of CIT(A) and had deleted the addition made by the AO.

HIGH COURT DECISION

1. The Tribunal referring the decision of the Supreme Court in the case of Apollo Tyres Limited Vs. CIT[2002]ITR273(SC) and the decision of Bombay High Court in case of CIT Vs. Akshay Textiles Trading and Agencies Private Limited [2008]304 ITR 401(BOM), did not find any infirmity in the order of CIT(A) for deleting addition made under Provisions of Section 115JB of the Income tax Act,1961.

APOLLO TYRES LIMITED VS. CIT[2002]ITR273(SC)

The relevant portion of the judgment of the Hon'ble Supreme Court is reproduced below as a ready reference. "The Assessing Officer, while computing the book profits of a company under section 115J of the Income-tax Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer, thereafter, has the limited power of making increases and reductions as provided for in the Explanation to section 115J.

The Assessing Officer does not have the jurisdiction to go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation.

The use of the words "in accordance with the provision of Parts II and III of Schedule VI to the companies act" in section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the company.

While so looking into the accounts of the company, the Assessing Officer 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 Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of company are maintained in accordance with the requirements of the Companies Act.

Sub-section (1A) of Section 115J does not empower the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the boots of account of the company. "

2. However in various judgements of tribunals and courts it was decided that even entails of items of exceptional and extraordinary nature should also be routed through P& L Account. It means that the Capital Gain earned by the assessee should be routed through profit and loss account and same should be added while calculating the Book Profit for the purpose of Section 115JB.

3. In DCIT Vs. Bombay Diamond Co.( Mumbai ITAT) it was decided that if the accounts were prepared according to the provisions of Part I & II of Schedule VI of the Companies Act,1956 ,then AO has no power to make adjustments beyond what provided under provisions of section 115JB. However the assessee in this case bypass provisions of Schedule VI and directly credited the Capital Receipt in Capital Reserve Account instead of routing the same through P & Loss Account the judgements of Apollo Tyres Limited Vs. CIT[2002]ITR273(SC) and the decision of Bombay High Court in case of CIT Vs. Akshay Textiles Trading and Agencies Private Limited [2008]304 ITR 401(BOM), did not apply to this case and hence AO has power to rework on calculation of Book Profit.

4. In the case of Akshay Textiles Trading and Agencies Pvt. Ltd., 304 ITR 401, wherein exactly similar issue was before the Hon'ble Bombay High Court, which reads as under:

C. Whether on the facts and in the circumstances of the case and in law, the Hon'ble Tribunal was correct in upholding the order of the CIT(A) in holding that the capital gains of Rs.19,74,489/- are not to be taken into account while computing the profits liable to be taxed under s.115JA of the IT Act, 1961 and that the decision of the Hon'ble Bombay High Court in CIT Vs. Veekaylal Investment Co. (P) Ltd., (2001) 166 CTR (Bom) 96: (2001) 249 ITR 597 (Bom), was not applicable?

The above issue was decided by the Hon'ble jurisdictional High Court as under:- 

1.  Insofar as question C, our attention is invited to the judgment of the Supreme Court in Apollo Tyres Ltd. Vs. CIT (2002). 
2. The question framed therein which is similar to question C has been answered in favour of the assessee and against the Revenue. In the light of that the question of law as framed would not arise.
3. In the case of Adbhut Trading Co. Pvt. Ltd. 338 ITR 94, the Hon’ble Bombay High Court held that once the accounts including profit and loss account had been prepared and certified by the authorities under the Companies Act, it was not open for the AO to state that P&L Account has not been prepared in accordance with the provisions of Companies Act. 
4.  Respectfully following the decision of Hon’ble Bombay High Court in `the case of Adbhut Trading Co. Pvt. Ltd. (supra) and in the case of Akshay Textiles Trading and Agencies Pvt. Ltd (supra), we do not find any infirmity in the order of ld. CIT(A) for deleting the addition under Section 115JB.
5. The High Court while upholding the order of Tribunal observed that the Tribunal had not committed any error while deleting the addition made by AO under Section 115JB of the Act.
6. Accordingly, the appeal filed by the Tax Authorities is liable to be dismissed.

CONCLUSION

From the above judgement it is clear that an AO during assessment proceedings has no powers to go behind the accounts of the Company to see whether same has been prepared according to the provisions of Part II and Part III of Schedule VI of the Companies Act,1956 or not. He has no power to start a fresh enquiry against the assessee on the basis of any entry found in the financial statement of the company. The AO in this case only has power to increase or deduction the Book Profits of the company according to the Explanation provided under provisions of Section 115JB of the Income tax Act,1961.

DISCLAIMER: The above case law is only for knowledge and information of readers. The views expressed here are the personal views of the author. In case of necessity do consult with tax professionals for more understanding and clarity on subject matter.