2005 (2) TMI 747 - AT - Income Tax

Minimum alternate tax - difference between the revalued price of the shares and the book value of shares as shown prior to revaluation to the Investment Revaluation Reserve Account in the balance sheet - whether the net profit as shown in the audited profit and loss account can be altered - HELD THAT - In the case before us, we are concerned with section 115JA which brings book profits , and not total income , to the charge of Minimum Alternative Tax. Explanation to sub-section (2) of section 115JA defines book profits to mean net profits as shown in the profit and loss account for the relevant previous year prepared under sub-section (2) , as increased or decreased by the amounts mentioned therein. It is clear that no discretion is available to the Assessing Officer to alter the net profit as shown in the Profit and Loss Account prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act except in the manner provided in the Explanation to sub-section (2) of section 115JA. There is nothing before us to suggest that the accounts of the assessee-company prepared and submitted before the Assessing Officer were either rejected or modified by the authorities under the Companies Act or were not approved/adopted in the Annual General Meeting of the assessee-company. Thus, the book profit as shown in the accounts of the assessee-company stood not only certified by the statutory auditors of the assessee-company but also accepted by all concerned under the Companies Act. In other words, the book profit as shown in the accounts of the assessee was book profit for all intent and purposes under the Companies Act. In the case before us, the accounts as also the book profits shown therein are duly certified by the statutory auditors of the assessee-company and the impugned adjustments sought to be made by the Assessing Officer are also not authorized by Explanation to sub-section (2) of section 115JA which is similar to Explanation to section 115J. Hence, the adjustments made by the Assessing Officer to the book profit shown by the assessee in the Profit Loss Account cannot be sustained in law. Thus, in the light of the law laid down by the Hon ble Supreme Court in Apollo Tyres Ltd. s case 2002 (5) TMI 5 - SUPREME COURT and the Hon ble jurisdictional High Court in Kinetic Motor Co. Ltd. s case 2003 (1) TMI 47 - BOMBAY HIGH COURT , wherein an identical issue was involved and decided against the department, we find no merit in the appeal filed by the Department. Appeal filed by the Revenue is, therefore, dismissed.

Issues Involved:
1. Inclusion of capital gains in book profits under Section 115JA of the Income-tax Act.
2. Jurisdiction of the Assessing Officer to alter the book profits shown in the audited profit and loss account.

Detailed Analysis:

1. Inclusion of Capital Gains in Book Profits under Section 115JA:

The primary issue is whether the capital gains of Rs. 52,95,500 should be included in the book profits for tax purposes under Section 115JA of the Income-tax Act. The assessee-company had revalued certain shares and sold them at the revalued price, thus not showing any profit on the sale in its profit & loss account. The capital gain was claimed as exempt under Section 54EA due to reinvestment in specified securities.

The Assessing Officer (AO) held that the capital gain, deemed as income under Section 45, should be included in the book profit for Section 115JA purposes. The AO added Rs. 52,95,500 to the net profit shown in the profit & loss account, arguing that the assessee was obliged to include capital gains as part of its book profit according to Accounting Standards.

However, the CIT(A) reversed this action, holding that the adjustment by the AO was beyond the scope of permissible adjustments under Section 115JA. The CIT(A) distinguished the case from the Bombay High Court judgment in CIT v. Veekaylal Investment Co. (P.) Ltd. [2001] 249 ITR 597 and aligned it with the Special Bench decision in Sutlej Cotton Mills Ltd. v. Asstt. CIT [1993] 45 ITD 22 (Cal.) (SB), which excluded capital gains from book profits.

2. Jurisdiction of the Assessing Officer to Alter Book Profits:

The Departmental Representative (DR) argued that the AO could scrutinize the profit & loss account to ensure it was prepared per Parts II and III of Schedule VI to the Companies Act, 1956. The DR cited provisions from the Companies Act and various Accounting Standards, suggesting that the AO could recast the profit & loss account if it did not conform to these standards.

The DR also referred to the statutory auditors' notes, which mentioned the revaluation and sale of investments, arguing that these notes indicated the book profit was not correctly reflected.

The assessee's representative countered, citing the Supreme Court judgment in Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 and the Bombay High Court judgment in Kinetic Motor Co. Ltd. v. Dy. CIT [2003] 262 ITR 330, which restricted the AO's jurisdiction to go behind the net profit shown in the profit & loss account certified by statutory auditors.

The Tribunal, considering these arguments, held that the AO does not have the jurisdiction to alter the net profit shown in the profit & loss account except as provided in the Explanation to Section 115JA. The Tribunal emphasized that the accounts certified by statutory auditors and accepted under the Companies Act should be deemed authentic for Section 115JA purposes.

Conclusion:

The Tribunal concluded that the AO's adjustments to the book profit were not authorized by the Explanation to Section 115JA. The statutory auditors' certification and acceptance of the accounts under the Companies Act were deemed sufficient. The appeal filed by the Revenue was dismissed, affirming that the capital gains should not be included in the book profits for Section 115JA purposes.

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