Whether capital gain arising out of the sale of land and building is liable to be included for computation of book profits under Section 115J?

Kumudam Printers Pvt Ltd Vs CIT (Madras High Court)– Whether capital gain arising out of the sale of land and building is liable to be included for computation of book profits under Section 115J – Whether when there is no failure on part of the appellant to disclose any material fact at the time of the original assessment and hence, the reopening of the assessment pursuant to a notice under Section 148 issued after the expiry of four years from the end of the relevant assessment year is liable to be annulled. – Assessee `s appeal allowed.

M/s.Kumudam Printers (P) Ltd.  Versus The Commissioner of Income Tax

IN THE HIGH COURT OF JUDICATURE AT MADRAS

DATED: 22.03.2011

Tax Case (Appeal) No. 826 of 2004

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PRAYER: Appeal filed under Section 260-A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal, Chennai “B” Bench, in I.T.A.No.1748/MDS/98 dated 14.07.2004.

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JUDGMENT

(Judgment of the Court was delivered by CHITRA VENKATARAMAN,J.)

The assessee has come on apeal as against the order of the Income Tax Appellate Tribunal, Madras “B” Bench, Chennai, made in I.T.A.No.1748/MDS/98 dated 14.07.2004 for the assessment year 1990-1991, raising the following substantial questions of law:

” 1. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in reversing the order of the Commissioner of Income Tax (Appeals) without considering the question relating to the validity of the reassessment under Section 147 of the Income Tax Act?

2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in disposing of the appeal under Section 254 of the Income Tax Act without considering the conclusion of the Commissioner of Income Tax (Appeals) that the proceedings under Section 147 of the Income Tax Act  are barred by limitation?

3. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in concluding that the capital gain arising out of the sale of the land and building is liable to be included in computing the book profits under Section 115J of the Income Tax Act?

4. Whether the Tribunal is right in law in not confirming the order of the Commissioner of Income Tax (Appeals) holding that there was no failure on the part of the appellant to disclose any material fact at the time of the original assessment and hence,the reopening of the assessment pursuant to a notice under Section 148 of the Income Tax Act issued after the expiry of four years from the end of the relevant assessment year is bad in law and the reassessment is liable to be annulled?

2. The assessee herein, a company registered under the Indian Companies Act, filed its return for the assessment year 1990-91 on 31.12.1990 declaring a loss of Rs.84,09,506/-. Subsequently, a revised return was filed on 26.03.1992 declaring a loss of Rs.79,07,238/- as against the original declared loss of Rs.84,09,506/-. While so, under Section 143(3) of the Act, the Assessing Officer determined the income under Section 115J at Rs.5,26,720/- on 27.03.1998 by treating the profit on the sale of fixed assets as part of the profits for the purpose of Section 115J of the Act.

3. The assessee preferred an appeal against the order dated 27.03.1998 contending that the re-opening of the assessment is unwarranted after four years from the date of relevant assessment year. Quite apart, the conclusion arrived at by the Assessing Officer that the profit derived out of sale of fixed asset ought to have been credited to the profit and loss account was unsustainable. The Commissioner of Income Tax (Appeals), by order dated 21.04.1998, pointed out  that the reopening of assessment was not in accordance with law and there was no failure attributable to the assessee to disclose material fact at the time of the original assessment. He pointed out  that the assessee had disclosed in the account and the schedule attached to the return, the profit on the sale of land and building and that the same had been credited to the Capital Reserve Account and directly taken to the balance sheet.  Quite apart from this fact, the Commissioner of Income Tax considered the merits of the inclusion of capital gains in the profit and loss account for the purpose of working out Section 115J of the Income Tax Act and allowed the appeal of the assessee. He held that Section 115J mandates the turnover to adopt the disclosed book profits, provided, the profit and loss account is in accordance with the provisions of Part II and Part III of Schedule VI to the Companies Act and that it was not open to the Assessing Officer to revise the profit except to the extent of specific adjustment mentioned therein.

4. Aggrieved by this, the Revenue went on appeal before the Income Tax Appellate Tribunal. A perusal of the grounds taken therein shows that the Revenue had challenged the order of the Commissioner of Income Tax on the aspect of limitation as well as jurisdiction under Section 147, as well as on merits.  While considering the said claim, the Tribunal, however, adverted to the merits of reopening of the assessment without touching on the limitation aspect. While setting aside the order of the Commissioner of Income Tax, the Tribunal held that the Assessing Officer was justified in bringing the sale of land and building, since the assessee had failed to disclose the profit on the sale of land and building in the Profit and Loss Account, but directly transferred it to the reserve account, which is against Clause 2(b) of Part II of Schedule VI of the Companies Act. The Tribunal pointed out  that while computing the total income under the Income Tax Act, the assessee is required to take into account income by way of capital gains under Section 45 of the Income Tax Act.  While computing the book profits under the Companies Act, the assessee has to include the capital gains for computing the book profits under Section 115J.  In this connection, the Tribunal also relied on the decision of the Bombay High Court reported in 249 ITR 597 (Commissioner of Income Tax Vs. Veekaylal Investments Company Private Limited) and thus the Assessing Authority’s order was restored and the order of the Commissioner of Income Tax (Appeals) was set aside.  Aggrieved by the same, the present appeal is filed by the assessee.

5. Learned counsel appearing for the appellant placed reliance on the decision of the Supreme Court reported in [2002] 255 ITR 273 (Apollo Tyres Ltd. Vs. Commissioner of Income Tax) to contend that Section 115J of the Act does not empower the Assessing Officer to embark upon a fresh inquiry as regards the entries made in the books of accounts of the company, to see that the books of accounts are certified by the authorities under the Companies Act, but the Tribunal erroneously placed reliance on the decision of the Bombay High Court reported in 249 ITR 597 (Commissioner of Income Tax Vs. Veekaylal Investments Company Private Limited).  When a specific ground was taken by the assessee before the Tribunal on the aspect of jurisdiction on account of limitation, without adverting to the same, the Tribunal has gone into the merits of the appeal of the Revenue and restored the order of assessment.

6. Learned Standing Counsel appearing for the Revenue placed reliance on the decision of the Kerala High Court reported in 321 ITR 132 (N.J.Jose and Co. (P) Ltd. Vs. Assistant Commissioner of Income Tax and another) to contend that unless provided under any of the provisions of the Act,  capital gains ought to have been included in the the computation of book profits.  In the above circumstances, learned counsel appearing for the respondent submitted that the matter be remitted to the Tribunal to consider the issues raised by the Revenue.

7. A reading of the order of the Tribunal shows that all that the Tribunal considered in its order was only as regards the computation of book profits. Referring to the Bombay High Court decision reported in 249 ITR 597 (Commissioner of Income Tax Vs. Veekaylal Investments Company Private Limited), the Tribunal held that the capital gains on the sale of capital asset was liable to be included for the purpose of computing book profits and thereby allowed the Revenue’s appeal. When the assessee had raised a specific ground on the validity of reopening of the assessment on the ground of limitation before the Commissioner of Income Tax (Appeals) and succeeded therein, the Tribunal should have considered the issue on limitation and jurisdiction under Section 147 before reversing the order of the Commissioner of Income Tax (Appeals). Since the issue on jurisdiction and limitation touch on the very reopening of the assessment, we feel, the proper course herein would be to set aside the order of the Tribunal, remand the matter back to the Tribunal with a direction to consider the issue of limitation and the jurisdiction under Section 147 to reopen the assessment.

8. Along with the issue of limitation, the Tribunal shall also consider the merits of the case, subject to its decision on limitation. It is open to the parties herein to raise such contentions as are available to them, before the Tribunal. Since the matter is now remanded back to the Tribunal, we are not expressing any opinion on the merits in the appeal before us.  Accordingly, the order of the Tribunal is set aside with a direction to the Tribunal to dispose of the appeal preferred by the Revenue on the issues of limitation as well as merits, in accordance with law.