2016 (11) TMI 1045 - AT - Income Tax

MAT computation - CIT(A)confirming the action of AO while added back interest income and income from sale of unit of Mutual Fund originally reduced from capital work in progress in computation of Book Profit u/s 115JB - Held that - Respectfully following the decisions of the Hon ble Apex Court in the case of Apollo Tyres Ltd. 2002 (5) TMI 5 - SUPREME Court that the assessee s interest income and profit on sale of Mutual Funds would not form part of the computation of book profits under section 115JB of the Act and consequently reverse the decision of the authorities below. - Decided in favour of assessee

Summary

Issues Involved:
1. Inclusion of interest income and income from the sale of mutual funds in the computation of 'book profits' under section 115JB of the Income Tax Act, 1961.

Detailed Analysis:

1. Inclusion of Interest Income and Income from Sale of Mutual Funds in Book Profits under Section 115JB:

The assessee-company, engaged in power generation, filed its return of income for A.Y. 2010-11, declaring total income under normal provisions and 'book profits' under section 115JB of the Income Tax Act, 1961. The Assessing Officer (AO) computed the 'book profit' under section 115JB at ?73,76,84,930/- by adding interest income and profit on the sale of mutual funds, which were not routed through the Profit & Loss Account as per the Companies Act, 1956.

Aggrieved by the AO's order, the assessee appealed to the CIT(A), who upheld the AO's decision, relying on judicial pronouncements in Veekaylal Investment Company Pvt. Ltd. and Kopran Pharmaceuticals Ltd. The assessee then appealed to the ITAT, arguing that the CIT(A) erred in including these incomes in the 'book profits' under section 115JB, as they were correctly considered under Capital Work-in-Progress (WIP) and not part of the Profit & Loss Account.

The assessee contended that the interest income and income from the sale of mutual funds were generated from idle funds temporarily invested during the construction of the power plant. These incomes were offered under 'income from other sources' under normal provisions, but not included in 'book profits' as per section 115JB, following AS-16 and the Accounting Standard on Accounting for Fixed Assets. The assessee argued that once accounts are prepared and certified under the Companies Act, they cannot be altered by the AO except for adjustments specified in the Explanation to section 115JB(2).

The ITAT examined the facts and judicial pronouncements, including the Supreme Court's decision in Apollo Tyres Ltd., which held that the AO could only examine if the books were certified under the Companies Act and make limited adjustments as provided in the Explanation to section 115JB. The Tribunal noted that the decisions in Akshay Textiles Trading and Agencies P. Ltd. and Adbhut Trading Co. P. Ltd. by the Bombay High Court, following Apollo Tyres Ltd., supported the assessee's position.

The ITAT concluded that the AO and CIT(A) erred in including the interest income and income from the sale of mutual funds in the 'book profits' under section 115JB. The Tribunal held that these incomes, correctly considered under Capital WIP, should not form part of the Profit & Loss Account and reversed the decisions of the authorities below. The appeal was allowed in favor of the assessee.

Conclusion:

The ITAT ruled that the interest income and income from the sale of mutual funds, which were correctly considered under Capital WIP and not part of the Profit & Loss Account, should not be included in the computation of 'book profits' under section 115JB. The appeal was allowed, and the decisions of the AO and CIT(A) were reversed.