|CORAM:||B. R. Baskaran (AM), Joginder Singh (JM)|
|CATCH WORDS:||Book Profits, capital gains, exempt income|
|DATE:||August 19, 2015 (Date of pronouncement)|
|DATE:||August 22, 2015 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 115JB: (i) Even if an amount is credited to the P&L A/c, the assessee can seek exclusion of that amount for purposes of “book profits” if a note to that effect is inserted in the A/cs (ii) The exemption conferred by S. 115JB to sums exempt u/s 10 should be extended to all sums which are not chargeable to tax|
The assessee held a parcel of land admeasuring about 61,506 sq.mtr as its capital asset. The said land was attached with development rights/FSI. The assessee transferred development rights/FSI of 55,464.04 sq.mtr which was available on a portion of above said land to its wholly owned Indian subsidiary company. The said transfer generated Long Term Capital Gain (LTCG) of 300.68 crores. The assessee disclosed the same as “Extra Ordinary Income” in the profit and loss account. The said LTCG was not chargeable to tax u/s 47(iv) of the Act as it arose from the transfer of a capital asset by a company to its wholly owned Indian subsidiary. For purposes of computation of book profits u/s 115JB, the assessee inserted a note in the accounts stating that the said amount credited to the P&L A/c did not have the character of “income” and was not chargeable as “book profits”. The AO & CIT(A) relied on the judgement of the Special Bench in Rain Commodities Ltd v/s DCIT (2010) (40 SOT 265; 131 TTJ 514) where it was held that if an amount, though not chargeable as capital gains u/s 47(iv), is credited to the P&L A/c, the same cannot be excluded from the book profits u/s 115JB. On appeal by the assessee to the Tribunal HELD allowing the appeal:
(i) The decision rendered by the Special Bench of Tribunal in Rain Commodities Ltd (40 SOT 265; 131 TTJ 514) is not applicable because in that case the capital gains had been included in the profit and loss account and it was accepted that the accounts have been prepared in accordance with the provisions of Part II and Part III of Schedule VI to the Companies Act. In the present case, it is clearly stated in the Notes forming part of accounts that the said profit is not includible for computing book profit u/s 115JB of the Act, even though it is credited to Profit and Loss account. The profit and loss account prepared in accordance with the provisions of Part II to Schedule VI of the Companies Act should be read along with the ‘Notes forming part of accounts’. Hence the net profit shown in the Profit and loss account shall be first adjusted to take care of the qualifications given in the Notes (CIT V/s Sain Processing & Wvg. Mills (P.) Ltd. (2010) 325 ITR 565 (Delhi) & K.K. Nag Ltd. V/s Additional Commissioner of Income-tax  52 SOT 381 (Pune) referred);
(ii) As regards the contention that since the profit arising on transfer of a capital asset by a company to its wholly owned subsidiary company is not treated as income” u/s 2(24) of the Act and since it does not enter into computation provision at all under the normal provisions of the Act, the same should not be considered for the purpose of computing book profit u/s 115JB of the Act, it is pertinent to note that the provisions of sec. 10 lists out various types of income, which do not form part of Total income. All those items of receipts shall otherwise fall under the definition of the term “income” as defined in sec. 2(24) of the Act, but they are not included in total income in view of the provisions of sec. 10 of the Act. Since they are considered as “incomes not included in total income” for some policy reasons, the legislature, in its wisdom, has decided not to subject them to tax u/s 115JB of the Act also, except otherwise specifically provided for. Clause (ii) of Explanation 1 to sec.115JB specifically provides that the amount of income to which any of the provisions of section 10 (other than the provisions contained in clause (38) thereof) is to be reduced from the Net profit, if they are credited to the Profit and Loss account. The logic of these provisions, in our view, is that an item of receipt which falls under the definition of “income”, are excluded for the purpose of computing “Book Profit”, since the said receipts are exempted u/s 10 of the Act while computing total income. Thus, it is seen that the legislature seeks to maintain parity between the computation of “total income” and “book profit”, in respect of exempted category of income. If the said logic is extended further, an item of receipt which does not fall under the definition of “income” at all and hence falls outside the purview of the computation provisions of Income tax Act, cannot also be included in “book profit” u/s 115JB of the Act.
(iii) A careful perusal of the decision rendered by the Special bench in the case of Rain Commodities Ltd would show that the above said legal contentions were not considered by the Special bench. The Special bench considered cases where the Courts were dealing with the issue of inclusion of Capital gains in the computation of “Book Profits”, but such capital gains were otherwise chargeable to capital gain tax u/s 45 of the Act under the normal provisions of the Act. However, here is the case that the profits and gains arising on transfer of capital is not falling under the definition of “transfer” and hence under the definition of “Capital gains chargeable u/s 45” and consequently, the same does not fall within the purview of the definition of “income” given u/s 2(24) of the Act. Further, the Special bench did not have occasion to consider the argument urged that the profits and gains arising on transfer of a capital asset by a holding company to its wholly owned Indian Company does not fall under the definition of “income” at all u/s 2(24) of the Act and hence the same does not enter into the computation provisions of the Act at all.