Growth Avenue Securities vs. DCIT (ITAT Delhi)

DATE: (Date of pronouncement)
DATE: December 16, 2009 (Date of publication)

Click here to download the judgement (growth_avenue_securities_115JB.pdf)

Even exempt capital gains are includible in “book profits”

The assessee earned long-term capital gains of Rs. 40.57 L which was not chargeable to tax u/s 54EC. As the said gains were credited to the P&L A/c, the assessee excluded the gains whilst computing “book profits” u/s 115JB in view of the Special Bench judgement in Sutlej Cotton Mills 45 ITD 22 (Cal) (SB) where it had been held that non-taxable capital receipts had to be excluded from book profits. The AO and the CIT (A) rejected the claim. On appeal by the assessee HELD dismissing the appeal:

(i) The effect of the judgements of the Supreme Court in Apollo Tyres and HCL Comnet is that if the accounts are prepared as per Schedule VI to the Companies Act, the AO has no jurisdiction to make adjustments to the “book profits” other than what was provided in the Explanation to s. 115JB. There is no scope for excluding non-taxable profits from the “book profits” as s. 54EC is not specified in the Explanation;

(ii) The assessee had itself included the capital gains in its P&L A/c and it was not the assessee’s case that its’ accounts were not as per Schedule VI;

(iii) It is true that the profits shown in the P&L A/c can be adjusted in respect of matters which are separately disclosed in the accounts or in the notes to accounts. E.g. prior period / extraordinary items shown separately (Khaitan Chemicals 307 ITR 150 (Del)) and current year’s depreciation shown separately in the notes (Sain Processing 17 DTR 215 (Del)). However, as it is not the assessee’s case that the capital gains was not otherwise includible in the net profit, this principle does not apply;

(iv) Though sub-section (5) of s. 115JB provides that “save as otherwise provided in this section, all other provisions of this Act shall apply”, the normal provisions of the Act are not relevant for the purpose of computing “book profits”.

Note: Sutlej Cotton Mills 45 ITD 22 (Cal) (SB), Frigsales 4 SOT 376 (Mum) & Karimjee 15 SOT 128 (Mum) held not to be good law. See also: Bombay Diamond Co (ITAT Mumbai): Even capital profits have to be added to “book profits” for s. 115JB