2015 (12) TMI 1419 - HC - Income Tax

Income from capital gain - whether should be included for the purpose of computing Book Profit under Section 115JB? - Held that - The proviso to the said Section 211(3)(C) of the Companies Act makes it clear that the standards of accounting specified by the Institute of Chartered Accountants of India shall be deemed to be the accounting standards until the accounting standards are prescribed by the Central Government under the subsection 3(C). The Assessing Officer has placed reliance on the accounting standards, vide No.9949 dated 25.1.1996 and has held that the transaction of sale property should have been brought into the profit and loss account as an extraordinary item since the assessee has failed to follow the accounting standards, determined the book profit after allowing the deduction towards cost as per provision to Section 115JB (2) of the Act. This order is confirmed by the appellate authority as well as by the ITAT. However, this exercise of the assessing authorities, in recomputing the book profit of the assessee is contrary to the principles of law laid down by the Apex Court in Appollo Tyres (2002 (5) TMI 5 - SUPREME Court) wherein held that the only power vested with the Assessing Officer is to make increases and deductions as provided in the explanation to Section 115JB of the Act. Assessing Officer has no power to embark upon a fresh enquiry in regard to the entries made in the books of accounts of the company. In the light of the judgment of Apollo Types (supra), we are of the opinion that the Assessing Officer has no power to recompute the book profit and has to rely upon the authentic statements of accounts of the company, the accounts being scrutinized and certified by the statutory auditors though with a qualification, approved by the company in general body meeting and thereafter filed before the Registrar of Companies, who has a statutory obligation to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. - Decided in favour of assessee.

Issues Involved:
1. Whether the income from capital gain should be included for the purpose of computing Book Profit under Section 115JB of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Inclusion of Capital Gain in Book Profit Calculation:
The core issue in this case is whether the capital gain should be included in the computation of book profit under Section 115JB of the Income Tax Act, 1961. The appellant, a company incorporated with the objective of running a hotel, sold a piece of land and recorded the capital gain directly in the capital reserve instead of the profit and loss account. The Assessing Officer argued that the capital gain should be included in the profit and loss account based on the accounting standards, leading to an increased book profit.

The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT) upheld the Assessing Officer's view, relying on the judgment of the Bombay High Court in the case of COMMISSIONER OF INCOME TAX vs VEEKAYLAL INVESTMENT CO.(P) LTD., which mandated the inclusion of capital gains in the profit and loss account for computing book profit.

2. Jurisdiction of Assessing Officer:
The appellant contended that the Assessing Officer exceeded his jurisdiction by rescrutinizing the book profit certified by statutory auditors and approved by the Registrar of Companies. Citing the Supreme Court's judgment in APOLLO TYRES LTD. vs COMMISSIONER OF INCOME TAX, the appellant argued that the Assessing Officer's role is limited to examining whether the books of account are certified by the authorities under the Companies Act and making adjustments as specified in the explanation to Section 115JB.

3. Compliance with Accounting Standards:
The Revenue argued that the appellant did not follow the standard accounting system as per the Companies Act, specifically Clause 3(XII)(b) of Part II of Schedule VI, which requires the disclosure of profits or losses from exceptional or non-recurring transactions in the profit and loss account. The Revenue maintained that the capital gain should be included in the profit and loss account, and the Assessing Officer was justified in rescrutinizing the book profit.

4. Interpretation of Section 115JB:
The court examined Section 115JB, which mandates that if the income tax payable on the total income computed under the Act is less than 7.5% of the book profit, the tax payable shall be deemed to be 7.5% of the book profit. The court referred to the Supreme Court's judgments in Apollo Tyres and HCL Comnet Systems, which clarified that the Assessing Officer's power is limited to making adjustments specified in the explanation to Section 115JB and does not extend to rescrutinizing the net profit shown in the profit and loss account.

5. Auditor's Report and Compliance with the Companies Act:
The court noted that the auditor's report, while qualifying the transfer of capital gain to the capital reserve, was accepted by the General Body and filed with the Registrar of Companies. The court emphasized that the Assessing Officer has no power to recompute the book profit by questioning the entries in the books of accounts certified by statutory auditors and approved by the Registrar of Companies.

Judgment:
The court concluded that the Assessing Officer has no power to recompute the book profit and must rely on the authentic statements of accounts certified by statutory auditors and approved by the Registrar of Companies. The substantial question of law was answered in favor of the assessee, and the appeal was allowed.

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