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TMI Blog2012 (4) TMI 395X X X X Extracts X X X X X X X X Extracts X X X X ..... why book profits should not be computed as per the provisions of sec. 115JB of the Act. In response, it was stated as under: "..........since the receipt on this account are not regular business receipts and since the assessee company followed method of accounting such receipts on sale of investment directly to the balance sheet, as a matter of consistency in following method of accounting, the same were directly taken to the Balance Sheet." The AO observed that as per sub-sec. [2] of sec. 115JB assessee was required to prepare the profit & loss account in accordance with Part II and Part III of Schedule VI of the Companies Act, 1956. He further observed that Part II and Part III of Schedule VI of the Companies Act, 1956, clearly provide various items relating to income and expenditure to be disclosed in the profit & loss account and, accordingly, profit on sale of shares should have been part of the profit & loss account. Accordingly, he computed the book profit u/s.115JB as under: Particulars Amount in Rs. Net Profit as per Profit & Loss A/c after Tax (97, 172) Add: Profit on sale of shares 3.080,000 Book Profit (A) 2.87,S28 Thus, Tax payable as per section 115JB (7. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee-company cannot consider capital gains for computing book profits under section 115JB of the Act". The High Court also felt that "it would be inappropriate to directly transfer such amounts to capital reserves and that they are requited to be shown vide clauses (2)(b) and (3)(xii) of Part II of Schedule VI of the Companies Act". 4. Both the parties were heard in detail. Both parties have also filed synopsis of the arguments after hearing of the case which have also been considered by us. The main submission of the Ld. Counsel of the assessee is that statutory auditors have certified that accounts were drawn in accordance with the provisions of the Companies Act, 1956 and the Accounting Standard. The accounts were approved in the Annual General Meeting of the company. The profit & loss account and the balance sheet were filed before the Registrar of Companies and the same have not been adversely commented upon or modified or withdrawn by the auditors or the Registrar of Companies. Therefore, AO had no authority to go behind the accounts to see whether same are prepared as per Part II and Part III of Schedule VI of the Companies Act, 1956. Reliance has been mainly placed on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-sec. [2] of this section the assessee is not only required to maintain accounts as per Part II and Part III of Schedule VI of the Companies Act, 1956 but is also required that accounting policies and accounting standard adopted shall remain same for the purpose of the Companies Act. In any case, the issue whether AO had power to go beyond the accounts to see whether same have been prepared in accordance Part II and Part III of Schedule VI of the Companies Act, 1956, was considered by the Special Bench of the Tribunal in the case of Rain Commodities Ltd. v. Dy. CIT [2010] 40 SOT 265 (Hyd.). He read out the head note and various paras of the decision and pointed out that it was clearly held after considering the decision of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. (supra), that it was open to the AO to see whether accounts have been prepared as per the requirements of Part II and Part III of Schedule VI of the Companies Act, 1956. He also pointed out that in the Special Bench even the decision of the Hon'ble Bombay High Court in the case of Akshay Textile Trading & Agencies (P.) (supra) was considered and it was observed that it cannot be said that this decision has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount. Therefore, it is a clear case where requirements of Part II and Part III of Schedule VI of the Companies Act, 1956 have not been complied with and accordingly AO has the right to look behind the accounts and compute the book profits. He also strongly relied on the order of the CIT(A) and pointed out that the First Appellate Authority has correctly relied on the decision of the Hon'ble Bombay High Court in the case of Veekaylal Investment Co. (P.) Ltd. (supra) which as per the decision of the Special Bench of the Tribunal in the case of Rain Commodities Ltd. (supra) is still valid. 7. In the rejoinder, Ld. Counsel of the assessee submitted in the decision of Bombay Diamond Co. Ltd. (supra), Tribunal has not considered a binding decision of Hon'ble jurisdictional High Court in the case of Akshay Textile Trading & Agencies (P.) Ltd. (supra). He also submitted that it should be appreciated that in Special Bench decision in Rain Commodities Ltd. (supra), the assessee had itself credited the profit & loss account with the surplus income which has resulted from the sale of assets of subsidiary company and assessee had claimed that such surplus being exempt u/s. 47[iv], could not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Syntex Ltd. for A. Y. 1998 - 99 [I.T. Appeal No. 1809/M/02] (9) Vijay Furniture Mfg. Co. (P.) Ltd. for AX. 2000 -01 [I.T Appeal No. 7104/M/05] (10) Dy. CIT v. Arundhati Traders (P.) Ltd. [2009] 27 SOT 305 (Mum) 11. Nanabhoy Jeejeebhoy (P.) Ltd. for A. Y. 1998 -99 [I.T. Appeal No. 1520/M/03] 12. Kunjvan Texfab (P.) Ltd. for A. Y. 1998-99 [I.T. Appeal No. 1112/M/02) 13. Realm Exports (P.) Ltd. [I.T. Appeal No. 5700/M/2004; order dated 26.03.2008] In all these decisions, again principally the decision of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. (supra) has been followed and in one or two cases even the decision Akshay Textile Trading & Agencies (P.) Ltd. (supra) has been followed. Even the decision of the Hon'ble Madras High Court in the case of Vijayashree Finance & Investment Co. (P.) Ltd. (supra) has been rendered u/s.115J. The Hon'ble apex court was concerned with sec. 115J. 9. Sec. 115J contained the following provisions regarding preparation of profit & loss account" "[(1A) Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s different from the previous year under this Act,- (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including profit and loss account; (iii) the method and rates adopted for calculating the depreciation, shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including profit and loss account for such financial year or part of such financial year falling within the relevant previous year. Therefore, when we compare the provisions of sec. 115J as to the requirement of the preparation of accounts, we see that originally the requirement was only limited that accounts shall be prepared in accordance with the provisions of Part II and Part III of Schedule VI of the Companies Act, 1956. But this requirement has been enlarged u/s. 115JB. As per the 1st proviso the requirement is that while preparing the accounts it should be ensured that Accounting Policies and Accounting Standard etc., adopted for preparing the accounts shall be the same as per the accounts laid down before the company in i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te the net profit and then follow the adjustments of MAT as usual: (1) If it is discovered that profit and loss account is not drawn up in accordance with Part II and Part III of Schedule VI to the2 Companies Act. However, the Assessing Officer cannot disturb the Net Profit as shown by the assessee where there are no such allegations, fraud or misrepresentation but only a difference of opinion as to whether a particular amount should be properly shown in the profit and loss account or in the Balance Sheet. (2) If accounting policies, accounting standards not adopted for preparing such accounts and method, rate of depreciation which have been incorrectly adopted for preparation of profit and 1059 account laid before the Annual General Meeting. Except for the above two cases, the Assessing Officer has no power to alter the net profit shown L the companies for the purpose of computing the book profit. Thus, it is clear that under MAT, the Assessing Officer should take the net profit as computed by the assessee and then make the adjustments under section 11 5JB of the Act. It is common that some companies follow an accounting year under the Companies Act, 1956 which is different from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e revenue. In the light of that, the question of law as framed would not arise." From the above, it is difficult to conclude that the Division Bench of Bombay High Court in this case has overruled the decision of another Division Bench without even a line of discussion. The decision of the Bombay High Court in the case of Veekaylal Investment Co. (P.) Ltd. (supra) holding that the book profits have to be computed in accordance with Parts II and if of Schedule VI to the Companies Act. This is in line with the decision of the Apex Court in the case of Apollo Tyres Ltd. (supra). The Mumbai High Court in the case of Akshay Textiles Trading & Agencies (P.) Ltd. (supra) has held that there is no question of law in view of the decision of the Apex Court in the case of Apollo Tyres Ltd. (supra). From this we are not able to infer that the decision of the Bombay High Court in the case of Veekaylal Investment Co. (P.) Ltd. (supra), is no longer good in law. Therefore, this case does not help the assessee. Thus, from the above it is clear that Special Bench has clearly held that the decision in the case of Akshay Textile Trading & Agencies (P.) Ltd. (supra) has not over ruled the decision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e every material feature, including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of an exceptional nature. Lastly, even under cl. 3(xii)(b) profits or losses in respect of transactions not usually undertaken by the Company or undertaken in circumstances of exceptional or non-recurring nature shows clearly that capital gains should be included for the purposes of computing book profits. That, capital gains would certainly be one of the various items whose information is required to be given to the share holders under the said cl. 3(xii)(b). So also, the disclosure is required to be made in respect of investment in the capital of a partnership firm if the company is a partner on the date of the balance sheet (see p. 1651 of the Companies Act by A. Ramaiya [Fourteenth Edn.]. Similarly, profits or losses on such investments are also required to be disclosed. [See cl. 3(xii)(a) of Part II of Sch. VI of the Companies Act]." Thus, from the above it is clear that book profits have to include the profits earned from capital gains. 11. Let us examine this issue from another angel. Part II and Part III of Schedule VI of the Companies Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar that profits from investment have to be credited to the profit & loss account. As observed earlier sec. 115JB mandate that annual accounts must be prepared in according with the Accounting Policies and Accounting Standards which have been followed for preparing accounts which were laid before the company for annual general meeting. As far significant accounting policies are concerned, Ld. DR has filed schedule of significant accounting policies and notes on account annexed to and forming part of the accounts for the year ended 31st march, 2005 - adopted by the assessee company in respect of investments states as under: Investments Investments in immovable properties & shares in companies are made to derive regular investment income therefrom. These investments are held as capital assets on long term basis and therefore, they are stated and valued at cost. The cost of investments comprise its purchase price, cost of construction, any attributable cost of improvement arid incidental expenses of acquisition and improvement. No provision for diminution/appreciation in the value of investments in being made. The Capital pains/Loss on Sale of Investments is dealt with at the time of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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