2009 (5) TMI 131 - AT - Income Tax

Summary

Issues Involved:
1. Deduction of long-term capital gain from net profit for computing book profit under Section 115JB.
2. Set off of brought forward losses while computing book profit under Section 115JB.
3. Disallowance of expenses incurred to earn dividend income.

Issue-wise Detailed Analysis:

1. Deduction of Long-term Capital Gain from Net Profit for Computing Book Profit under Section 115JB:

The primary issue was whether the assessee could deduct long-term capital gains exempted under Section 54EC from the net profit shown in the Profit & Loss (P&L) account while computing book profit under Section 115JB of the IT Act.

- The assessee argued that the net profit included long-term capital gains, which should be excluded from book profit computation under Section 115JB due to the exemption under Section 54EC.
- The CIT(A) rejected this claim, stating that Section 115JB does not provide for such an exclusion.
- The Tribunal upheld the CIT(A)'s decision, emphasizing that Section 115JB is a self-contained code with specific provisions for computing book profit. The adjustments allowed are explicitly mentioned in the Explanation to Section 115JB, and any deduction not specified therein, such as under Section 54EC, cannot be considered.
- The Tribunal referenced the Supreme Court's rulings in Apollo Tyres Ltd. vs. CIT and CIT vs. HCL Comnet Systems & Services Ltd., which clarified that the AO's power is limited to verifying whether the P&L account is prepared as per the Companies Act and making adjustments only as specified in the Explanation to Section 115JB.
- The Tribunal also noted that the Bombay High Court in CIT vs. Veekaylal Investment Co. (P) Ltd. held that capital gains must be included in book profit computations under Section 115J, a predecessor to Section 115JB.
- The Tribunal concluded that since the long-term capital gain was included in the net profit as per the P&L account prepared under the Companies Act, it could not be excluded from the book profit unless explicitly provided in the Explanation to Section 115JB.

2. Set off of Brought Forward Losses while Computing Book Profit under Section 115JB:

- The assessee did not press this ground during the hearing.
- Consequently, the Tribunal rejected this ground as not pressed.

3. Disallowance of Expenses Incurred to Earn Dividend Income:

- The assessee contested the CIT(A)'s decision to uphold the AO's disallowance of 15% of dividend income as expenses incurred to earn the dividend income.
- The Tribunal noted that the assessee's financial statements included various sources of income, including dividends, and it was unclear whether the loans taken (on which interest was paid) were used to acquire shares that generated the dividend income.
- The Tribunal found that the AO had disallowed 25% of the dividend income as expenses, which the CIT(A) reduced to 15%. The Department did not appeal this reduction.
- The Tribunal decided to remand this issue to the AO for fresh adjudication in light of the latest legal position on Section 14A of the Act. The AO was instructed to re-examine the matter and decide accordingly, ensuring any disallowance is restricted to 15% of the dividend income as upheld by the CIT(A).

Conclusion:

- The appeal was partly allowed for statistical purposes, with the primary ground regarding the exclusion of long-term capital gains from book profit computation under Section 115JB being rejected.
- The issue of set-off of brought forward losses was dismissed as not pressed.
- The disallowance of expenses related to dividend income was remanded to the AO for fresh adjudication.