2019 (9) TMI 192 - AT - Income Tax

Penalty u/s 271(1)(c) - MAT - Book profit u/s 115JB - capital gain on the sale of shares of Dabur Pharma which was directly credited to the capital reserve account by the assessee should have been entered in the Profit and Loss account and added the same to the income of the assessee u/s 115JB also made an addition and u/s 14A - HELD THAT - Whether the capital gain that had arisen on the sale of Dabar Pharma share was rightly credited by the assessee to the capital reserve account or rightly rejected by the AO on the ground that it has to be routed through profit and loss account, is a debatable issue. There is no dispute that the accounts of the assessee were prepared in accordance with the provisions of Part II of Schedule VI of the Companies Act and the Hon ble Apex Court in the case of Apollo Tyres, 2002 (5) TMI 5 - SUPREME COURT held in unequivocal terms that the AO while computing the income u/s 115J has only the power of examining whether the books of accounts are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act; that the AO thereafter has the limited power of making the increases and reduction as provided for in the Explanation to the said section and to put it differently, AO does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to Section 115J. It is not the case of the Revenue that the profit and loss account of the assessee was not prepared in accordance with the provisions of Part II of Schedule VI of the Companies Act nor has it been that the same does not contain any certificate by the competent authority under the Companies Act as having been properly maintained in accordance with the provisions of the Companies Act. In such a situation, we are in agreement with the submission of the assessee that the non-inclusion of the capital gains by the assessee in the profit and loss account is not a ground for the AO to levy the penalty. In fact, in DCIT vs. Arundhati Traders P. Ltd. 2008 (12) TMI 440 - ITAT MUMBAI the Tribunal held that once an asset is held as an investment by the Company and reflected as an investment in the balance sheet of the company from year to year, then any gain on sale of such investment is not a link or to profit and gain of business carried on by respective company, and the same could not be adjusted for working out book profit of the company under section 115JB. Similar view is taken by the Hyderabad Bench of the Tribunal in the case of New Oriental Trollers P. Ltd. vs DCIT 2010 (7) TMI 1180 - ITAT HYDERABAD . The inclusion or otherwise of the capital gains in the capital reserve account directly without routing it through the profit and loss account is a debatable issue and no penalty can be levied basing on that issue. Assessee, however, revealed the same by offering it to tax and also in the notes of accounts. It is only a difference of opinion between the Revenue and the assessee as to the treatment given to the capital gain either or not by routing it through the profit and loss account. We, therefore, do not have any reason to sustain the penalty and the same is directed to be deleted. - Appeal of the assessee is allowed.

Summary

Issues:
1. Penalty under section 271(1)(c) of the Income-tax Act for inclusion of capital gain in profit and loss account.
2. Disallowance under section 14A of the Income-tax Act.
3. Debatable issue of crediting capital gain to capital reserve account without routing it through profit and loss account.

Issue 1: Penalty under section 271(1)(c) for inclusion of capital gain in profit and loss account:

The case involved an appeal challenging the order of the Commissioner of Income-tax (Appeals) regarding the penalty imposed on the assessee for including capital gain on the sale of shares in the profit and loss account for computation under section 115JB of the Income-tax Act. The assessee argued that the capital gain was correctly credited to the capital reserve account as per the decision in Sutluj Cotton Mills Ltd. case and subsequent judgments. The Revenue contended that the assessee's withdrawal of the appeal against the assessment indicated admission of default. The Tribunal analyzed the legal position, emphasizing that the treatment of capital gains was a debatable issue. Referring to relevant case laws, the Tribunal held that the inclusion or exclusion of capital gains in the profit and loss account without routing through it was a matter of interpretation. As the assessee disclosed the information and the accounts were prepared in accordance with the Companies Act, the penalty was deleted.

Issue 2: Disallowance under section 14A of the Income-tax Act:

The Commissioner of Income-tax (Appeals) had deleted the penalty related to the disallowance under section 14A of the Income-tax Act. This decision was not challenged in the appeal before the Tribunal. Therefore, the issue of disallowance under section 14A was not further discussed in the judgment.

Issue 3: Debatable issue of crediting capital gain to capital reserve account without routing it through profit and loss account:

The core issue revolved around whether the capital gain from the sale of shares should have been credited to the profit and loss account for computation under section 115JB of the Income-tax Act or to the capital reserve account, as done by the assessee. The Tribunal referred to the Sutluj Cotton Mills case, which clarified that capital receipts without the character of income should not be added to book profit for taxation. The Tribunal highlighted that the treatment of capital gains was a matter of interpretation and not a clear case of concealment. It noted that the accounts were prepared in accordance with the Companies Act, and the AO's power was limited to adjustments provided in the Explanation to section 115JB. Relying on legal precedents, the Tribunal concluded that the treatment of capital gains was a debatable issue, and the penalty was unjustified. Therefore, the penalty was deleted in favor of the assessee.

In conclusion, the Appellate Tribunal ITAT DELHI ruled in favor of the assessee, allowing the appeal and deleting the penalty imposed under section 271(1)(c) of the Income-tax Act. The judgment emphasized the debatable nature of the treatment of capital gains and the compliance of the assessee with accounting standards, leading to the decision to annul the penalty.