Citation: Rain Commodities Ltd. Vs. DCIT (ITA No. 673/Hyd/2009)
Court: ITAT, HYDERABAD BENCH, SPECIAL BENCH ‘B’, HYDERABAD
Merely because the long term capital gain is exempt under section 47(iv) under the normal provision of the Act, it is not correct to say that it is also to be reduced from the net profit for the purpose of computing book profit under section 115JB of the Act when the Explanation to section 115JB does not provide for any deduction in terms of section 47(iv)
Rain Commodity Limited (‘Assessee’) is a company and filed its return of income for the assessment year (‘A.Y.’) 2004- 05 declaring a loss under normal provisions of the Income tax Act (IT Act). In spite of book profit, no income was offered to tax under section 115JB i.e. Minimum Alternate Tax (MAT). The assessment was completed under section 143(3) of the IT Act reducing the loss declared under normal provisions of the IT Act after making an adjustment on account of deferred revenue expenditure. Upon examination of records, the Commissioner of Income Tax (‘CIT’) assumed his jurisdiction under section 263 of the IT Act for revision on the ground that Assessee was liable to pay MAT on the book profit as declared by the Assessee in the profit and loss account. During the previous year, the Assessee sold certain capital assets to its 100 per cent subsidiary and contended that such transfer cannot be regarded as transfer as per section 47(iv) of the IT Act and therefore, no capital gains on account of such transfer would be liable to tax in the hands of the Assessee. Therefore, the Assessee submitted that if such capital gains are also reduced from the book profits, the Assessee would not have any positive book profit liable for tax under the provisions of MAT.
The CIT did not convince with the Assessee’s arguments and held that the order passed by the Assessing Officer (‘AO’) was erroneous and prejudicial to the interest of the revenue and directed the AO to tax such book profits without any reduction on account of capital gains sought under section 47(iv) of the IT Act. Aggrieved by the order of the CIT, Assessee preferred an appeal before the Income Tax Appellate Tribunal (‘Tribunal’).
Contention of the Assessee before the Tribunal:
· The intention of the legislature is to tax only the ‘profits’ of the company under section 1 15JB of the IT Act and not to tax profits other than normal business profits generated while carrying on the business activities.
· The genesis of section 11 5J, thereafter section 115JA and now section 11 5JB was to ensure that the assessee, while making profit from operations, should not enjoy tax free status due to various deductions available. Therefore, there was never any intention of the legislature to tax what is not profit from operations under section 1 15JA (1 15JB now) of the IT Act.
· Section1 1 5JB(2) specifically provides that 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 with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. Therefore, the profit realized from sale of assets did not form part of the book profit as required to be shown in the profit and loss account as an extraordinary item under the provisions of Parts II and III of Schedule VI to the Companies Act.
· The profits in the nature of income commercially understood can only be liable to tax under section 11 5JB and not capital receipt which may be admittedly of commercial in nature like gift, amalgamation reserve, capital reserve and revaluation reserve irrespective of the treatment in the books of account. Therefore, merely on account of accounting treatment given to the particular receipt, the nature of receipt cannot be decided. Hence, the profit arising on sale of investment cannot be treated as revenue receipt arising from the carrying on the business of the Asses see and the intention of the legislature is to tax commercial profits under section 115JB and not profits arising on sale of assets.
· As per the definition of income under section 2(24) of the IT Act, income includes any capital gains chargeable under section 45 of the Act. Capital gains which are not chargeable under section 45 shall not be treated as income under section 2(24) of the IT Act and consequently as the charging section i.e., section 4 of the IT Act fails and such gain shall not be chargeable to tax under any other provision of the IT Act.
· The explanation to the section 11 5JB refers to the exclusion of income which is not chargeable to tax under section 10 for calculating book profits. Thus, the receipts which are not taxable under the normal provisions of the IT Act cannot be treated as part of book profit under section 11 5JB.
· The validity of the exemption of capital gains under section 47(iv) has not been questioned by the Revenue. Considering the self contained code is section 115JB(5) of the IT Act which states that ‘save otherwise provided in this section, all other provisions of the act shall apply to every assessee being a company’ and thus other provisions of the Act will continue to apply in view of 115JB(5).
· Thus, the order of the CIT under section 263 of the IT Act directing to treat the surplus arising from transfer of assets as book profit is not correct and same needs to be reversed. Otherwise, virtually it will mean taxing capital receipt as income which is not the intention of the section 115JB of the Act.
Contention of Revenue before the Tribunal:
· The very term used to describe the scheme of taxation under section 115JB of the IT Act is ‘MAT ’, i.e., to be seen as an alternate method of taxation. This provision is to be invoked when the tax payable by the company fell below 30 per cent. In such circumstances, the regular provisions ceased to operate and a new and alternate basis of taxation was provided for. The intention of the section is to tax the book profit, irrespective of its nature or component and without the privileges of deductions and exemptions available under the regular provisions.
· Relying on the decision of the Honorable Supreme Court in case of Apollo Tyre’s Limited (255 ITR 273) and HCL Com net Systems and Services Ltd. (305 ITR 409), it was contended that on the basis of audited accounts of the Assessee the capital gains of sale of assets cannot be excluded from the net profit for computing book profit unless specifically provided in Explanation to section 115JB. There being no reference to section 47(iv) in the explanation 1 to section 115JB, assessee is not entitled to any such deduction from the net profit.
· Provisions of IT Act relevant for computation of regular income are not relevant for the purpose of computing book profits. If the argument that exempt income is to be excluded from the computation of book profits is accepted, then all the provisions of the IT Act ought to apply to net profit to arrive at book profit and such an interpretation would render the non- obstante clause of section 11 5JB( 1) ineffective and section 115JB(2) superfluous. Section 11 5JB does not classify book profits into heads of income, taxable income and exempt income.
· Relying on the decision of N.J. Jose & Co. (321 ITR 132)(Ker) it was contended that there was no provision in the IT Act for exclusion of exempt income included in the Profit and Loss account;
· Declaration of dividend is not a pre- requisite condition for application of section 115JB. The only condition for invoking provision of section 115JB is that the income tax payable by the company if it is less than a prescribed percentage of the book profit as was held by the Honorable Bombay High Court in VeeKaylal Investment Company Pvt. Ltd. (249 ITR 597).
Observation and decision of the Tribunal
· Under MAT provisions, the AO is concerned with the adjustments to be made with the net profit as shown in the profit and loss account. The AO has the power to alter the net profit only on the following two grounds, viz. (i) If it is discovered that profit and loss account is not drawn in accordance with Part II and III of Schedule VI of the Companies Act, or (ii) If the accounting policies and / or accounting standards are not adopted for the preparation of profit and loss account or methods / rate of depreciation have not been correctly adopted for preparing such profit and loss accounts laid before the annual general meeting. Thus, it is clear that AO needs to adopt the net profit as computed by the assessee and then make adjustments under section 1 15JB.
· The Bombay High Court in Veekaylal Investment Company Pvt. Ltd. (supra) held that while computing book profits under the Companies Act, the assessee has to include capital gains for the purpose of computing book profits under section 115J.
· It is undisputed fact that long term capital gains earned by the Assessee is included in the net profit determined as per Profit and loss account which has been prepared in accordance with the per Part II and Part III of Schedule VI to the Companies Act. The statutory auditors have reported that in their opinion, the profit and loss account and the balance sheet are in compliance with the Accounting Standards referred to in sub-section (3C) of section 211 of the Companies Act, and further reported that the balance sheet and profit and loss account read together with the notes thereon, give the information required by the Companies Act, 1956 in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted. In the notes on accounts, it is no where mentioned and claimed that though the long term capital gain is included in the profit and loss account but it is not to be includible in the net profit in terms of provisions of Part II and Part III of Schedule VI to the Companies Act or the accounting principles accepted under the Companies Act.
Hence, it is not a case of the Assessee that the long term capital gain was not includible in the profit and loss account prepared in terms of Schedule VI to the Companies Act. Only in the computation of book profit under section 11 5JB of the Act, the Assessee claimed exclusion of long term capital gain which is exempt under section 47 (iv) of the IT Act.
· When the Assessee itself has included the capital gains arising from sale to subsidiary in the profit and loss account, the same cannot be excluded under any of the explanations under section 115 JB.
Act to the extent of the matter provided in these sections. As regards the expression ‘save as otherwise’ provided in this section 115 JB clearly means that what is provided in section 11 5JB should be religiously followed and anything over and above the matter provided in section 115JB will be subject to other provisions of the IT Act. The provisions of section 11 5JB have an overriding effect upon other provisions of the IT Act. The method of computation of book profit provided in Explanation to section 115JB should be followed while computing the book profit and the normal provisions of computation of profit under any head of the Act shall not be applicable.
· The entire mechanism for the computation of book profit is clearly set out in section 115JB( 1) read with Explanation thereto. The starting point being the net profit as shown in the profit and loss account prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act but also the items, which are to be increased or reduced , find separate mentioned in the Explanation of the section itself. So, the computation of book profit is to be done strictly as per the Explanation to section 115JB of the IT Act and hence, no assistance from any other section of the IT Act can be taken for the same.
· The exemption granted under section 47(iv) / 47(v) are not complete exemption but deferment of tax. Further, the capital gains arising from sale of assets is after taking into account cost of acquisition (notional fair market value in some cases) as indexed, but in case of book profits it is simple difference between the sale price and cost of acquisition.
· In view of the above, the Tribunal held that merely because long term capital gains is exempt under section 47(iv) under normal provision of the IT Act, it does not mean that the same needs to be reduced from the net profit also for the purpose of computing book profit under section 115JB
This decision is in line with the Honorable Supreme Court’s decision in case of Apollo Tyre Ltd. (supra). The ruling clarifies that provision of section 115JB overrides the normal provision of the IT Act and that the computation of book profits needs to be strictly adhered to in line with the methodology set out in the section 115JB(1). Considering the facts of this case, the Tribunal did not find necessary to dwell upon the situation where the capital gains are credited directly to Reserve Account.