2008 (2) TMI 815 - AT - Income Tax

MAT - Computation of book profit u/s 115J - income from capital gains - Assessee transferred a portion of the surplus of the sale consideration in excess of the cost of acquisition directly to the capital reserve account of the assessee-company - HELD THAT - According to the standard accounting practices as well as under the Income-tax Act the assessee has two options to choose the manner in which the said surplus amount is to be accounted. The first method is that the surplus being a profit arising on a transaction even though of an exceptional nature may be credited to the profit and loss account and thereby transferred to the general reserve account of the assessee if there is excess. That is the amount may pass through the profit and loss account by the credit side. The other option available is that the transaction being of an exceptional nature the profit arising therefrom may directly be credited to the capital reserve account without being reflected in the profit and loss account. In the case of CIT v. Veekaylal Investment Co. P. Ltd. 2001 (2) TMI 117 - BOMBAY HIGH COURT held that the capital gains arising to a company should form part of the book profit for the purpose of section 115J. As far as this issue is concerned there is no functional distinction between section 115J and section 115JB. Therefore we find that the specific issue of capital gains vis-a-vis minimum alternate tax profit has been decided by the jurisdictional High Court in the above judgment and we are bound to follow the above judgment. If so the lower authorities have rightly held that the amount should be included in the book profit for the purpose of section 115JB. It is true that the hon ble Supreme Court has held in the case of Apollo Tyres Ltd. v. CIT 2002 (5) TMI 5 - SUPREME COURT that the assessing authority does not have the jurisdiction to make adjustments in the book profits certified by the statutory auditors of the company other than the adjustment provided under the Explanation thereto. But that is a general proposition of law declared by the hon ble Supreme Court. On the other hand the Bombay High Court in the case has specifically dealt with the question of capital gains. Therefore we find that the decision in the case of CIT v. Veekaylal Investment Co. P. Ltd. is more applicable to the present case. Thus we hold that this appeal filed by the assessee is liable to be dismissed.

Summary

Issues:
1. Whether the amount transferred to the capital reserve account should be included in the book profit for the purpose of assessment under section 115JB.
2. Whether the assessee followed standard accounting procedures in preparing its profit and loss account.
3. Application of judicial precedents regarding the treatment of profits from exceptional transactions for computing book profit under section 115JB.

Analysis:

Issue 1:
The appeal involved a dispute regarding the inclusion of an amount transferred to the capital reserve account in the book profit for assessment under section 115JB. The assessee argued that the surplus amount did not relate to the operating results and therefore should not be included. However, the Assessing Officer and the Commissioner of Income-tax (Appeals) held that the amount should form part of the book profit. The Tribunal considered the standard accounting practices and the provisions of the Companies Act, 1956. The Bombay High Court's decision in CIT v. Veekaylal Investment Co. P. Ltd. [2001] 249 ITR 597 was cited, emphasizing the disclosure of profits from exceptional transactions. The Tribunal concluded that the amount should be included in the book profit under section 115JB.

Issue 2:
The assessee contended that it followed standard accounting procedures by transferring the surplus amount directly to the capital reserve account, as permitted by the Companies Act, 1956. The Tribunal examined the options available to the assessee for accounting the surplus profit and considered the implications for computing taxable income under the minimum alternate tax scheme. The Tribunal referenced the decision in ITO v. Max Well Dyes and Chemicals P. Ltd. [2005] 2 SOT 461 to support the contention that the method of transferring the surplus to the capital reserve account was compliant with accounting standards.

Issue 3:
Regarding the application of judicial precedents, the Tribunal compared the general proposition of law established by the Supreme Court in Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 with the specific issue of capital gains addressed by the Bombay High Court in CIT v. Veekaylal Investment Co. P. Ltd. [2001] 249 ITR 597. The Tribunal noted that the Bombay High Court's decision was more relevant to the present case, emphasizing the inclusion of capital gains in book profit computation under section 115JB. Consequently, the appeal filed by the assessee was dismissed based on the judicial precedents and accounting practices discussed during the proceedings.