2010 (7) TMI 794 - AT - Income Tax

Revision u/s 263 - Whether the CIT was justified in invoking the provisions of section 263 and directing the AO to re-compute the book profit u/s 115JB by considering the P L account prepared in accordance with Parts II and III of Schedule VI to the Companies Act, 1956 on account of gains arising out of the transfer of assets to wholly-owned subsidiary as part of book profit without considering the provisions of section 47(iv)? - facts of the case are that, the assessee is a company filed return of income for the AY 2004-05 declaring a loss and assessment was completed u/s 143(3) determining the total loss after making an addition towards deferred revenue expenditure. HELD THAT - Even declaration of dividend is not a must for application of section 115JB. The purpose of this section is to tax companies which were making profits but not paying taxes due to so many exemptions and deductions. The reference to the declaration of dividend in the context of section 115JB by the Finance Minister or by the Circulars are merely explanations to the kind of malaise that the section sought to address. For invoking this section, there is no pre-requisite condition that the company should have declared dividend to the shareholders. Long-term capital gain is to be included in the net profit prepared under the Companies Act and the same is not deductible from the net profit for the purpose of computing book profit u/s 115JB. We further hold that merely because the long-term capital gain is exempt u/s 47(iv) under the normal provision of the Act, it is not correct to say that it is also to be reduced from the net profit for the purpose of computing book profit u/s 115JB when the Explanation to section 115JB does not provide for any deduction in terms of section 47( iv ). In other words, we hold that section 47( iv ) of the Act has no application in the computation of book profit under section 115JB of the Act. In fact only because the Government felt that companies availing of various deductions permitted under the Income-tax Act showed a low income for the purpose of income-tax but was able to show healthy profits as per books on the basis of which dividends were distributed and to tax these types of companies that tax on book profits were introduced. By again importing deductions allowed under the normal provisions of income-tax into computation of book profits, we will be negating the very purpose for which these sections were introduced. To sum up, we hold that in the absence of any provision for exclusion of capital gains exempted in the computation of book profit under the provisions contained in Explanation to section 115JB, the assessee is not entitled to the exclusion thereof as claimed. In the result, we answer the question as against the assessee.

Issues Involved:
1. Justification of the CIT invoking provisions of section 263.
2. Computation of book profit under section 115JB.
3. Inclusion of capital gains exempt under section 47(iv) in the book profit.
4. Applicability of other provisions of the Income-tax Act in computing book profit under section 115JB.

Detailed Analysis:

1. Justification of the CIT invoking provisions of section 263:
The CIT assumed jurisdiction under section 263 of the Income-tax Act, 1961, to revise the assessment order on the grounds that the assessee was liable to pay income-tax on book profit as declared in its profit and loss account. The CIT directed the Assessing Officer to re-compute the book profit under section 115JB by considering the profit and loss account prepared in accordance with Parts II and III of Schedule VI to the Companies Act, 1956, including gains arising from the transfer of assets to a wholly-owned subsidiary without considering the provisions of section 47(iv). The tribunal noted that none of the parties advanced any serious objection about the validity of the assumption of jurisdiction by the CIT under section 263.

2. Computation of book profit under section 115JB:
The assessee argued that the intention of section 115JB is to tax only the 'profits' of the company generated from normal business activities and not extraordinary items like capital gains. The assessee cited various judicial precedents to support the claim that only business profits should be considered for book profit. However, the tribunal emphasized that the profit and loss account must be prepared in accordance with Parts II and III of Schedule VI to the Companies Act, which requires the inclusion of every material feature, including extraordinary items.

3. Inclusion of capital gains exempt under section 47(iv) in the book profit:
The tribunal discussed whether capital gains exempt under section 47(iv) should be excluded from the book profit. The assessee contended that since the capital gains were exempt under section 47(iv), they should not be included in the book profit. However, the tribunal referred to the Bombay High Court's decision in Veekaylal Investment Co. (P.) Ltd., which held that capital gains must be included in the book profit as per the Companies Act. The tribunal also noted that the Supreme Court in Apollo Tyres Ltd. and HCL Comnet Systems & Services Ltd. had ruled that the Assessing Officer cannot go beyond the net profit shown in the profit and loss account except for adjustments specified in the Explanation to section 115JB.

4. Applicability of other provisions of the Income-tax Act in computing book profit under section 115JB:
The tribunal clarified that section 115JB is a self-contained code and has an overriding effect on other provisions of the Act. The computation of book profit must strictly follow the method provided in the Explanation to section 115JB, and no assistance from other sections of the Act can be taken for this purpose. The tribunal rejected the assessee's argument that the exempt income under section 47(iv) should be excluded from the book profit, emphasizing that the provisions of section 115JB must be followed religiously.

Conclusion:
The tribunal concluded that the CIT was justified in invoking section 263 and directing the re-computation of book profit under section 115JB. It held that capital gains exempt under section 47(iv) should be included in the book profit as per the Companies Act and cannot be excluded unless specifically provided in the Explanation to section 115JB. The tribunal emphasized that section 115JB has an overriding effect on other provisions of the Income-tax Act, and the computation of book profit must strictly adhere to the method provided in the section. The question referred to the tribunal was answered against the assessee, and the appeal was dismissed.

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