*Even exempt income is taxable under MAT / s.115JB*
*Rain Commodities vs. DCIT (ITAT Hyderabad Special Bench)***
The assessee credited its P&L A/c with an amount of Rs. 149.77 crores being
the profit on sale of assets to its wholly owned subsidiary. *As the said
profits were not chargeable to tax u/s 47(iv), the assessee took the view
that the same had also to be reduced from the “book profits” u/s 115JB*. The
Special Bench had to consider whether exempt income could be excluded from
the computation of “book profits” u/s 115JB. HELD deciding against the
assessee:
(i) The AO can alter the “book profit” only in two circumstances (a) if the
P&L A/c is not drawn up in accordance with Parts II & III of Schedule VI to
the Companies Act or (b) If accounting policies & standards, method & rate
of depreciation have been incorrectly adopted for preparation of the P & L
A/c. Except for the said two cases, the AO has no power to alter the net
profit shown in the P&L A/c. Under (a), *the AO cannot disturb the Net
Profit shown by the assessee where there are no allegations of fraud or
misrepresentation but only a difference of opinion as to whether a
particular amount should be properly shown in the P&L A/c or Balance sheet*;
(ii) *Parts II & III of Schedule VI to the Companies Act do not permit the
exclusion of capital gain from the P & L A/c*. The P & L A/c is required to
disclose every material feature including credits or receipts and debits or
expenses in respect of non-recurring transactions or transactions of an
exceptional nature including capital profits (*Veekaylal Investments* 249
ITR 597 (Bom) followed). Items referred to in the Notes are a part of the
P&L A/c (*Sain Processing*221 CTR 493 (Del) followed;
(iii) The assessee had included the said capital gains in the P & L A/c and
it was not its’ case that same was not includible. *The fact that the
capital gains was exempt u/s 47(iv) does not mean it can be excluded from
the “book profit” because no such exclusion was permitted under the
Explanation to s. 115JB*. The taxability of capital gain is relevant only
for the purpose of computation of income under the normal provisions and has
nothing to do with the computation of “book profits”. {*N.J. Jose & Co* 217
CTR 479 (Ker) (capital gains exempt u/s 54E) followed};
(iv) The argument that as s. 115JB (4) provides that “*save as otherwise
provided in this section all other provisions of the Act shall apply*” does
not mean that the exemption provisions of s. 47(iv) can be read into s.
115JB. This only means that while the computation has to be as per s. 115JB,
anything over and above that will be subject to other provisions of the Act.
*Frig Sales*4 SOT 376 (Mum) overruled);
(v) Accordingly, in the absence of any provision for exclusion of exempted
capital gain in the computation of book profit u/s 115JB, the assessee is
not entitled to the exclusion claimed.
Note: Though the SB observed that it was not necessary for it to dwell upon
a situation where the assessee has directly credited the profit on sale of
asset to a reserve Account, it referred with approval to *Bombay
Diamond
Co<http://itatonline.org/archives/index.php/dcit-vs-bombay-diamond-co-itat-mumbai-even-capital-profits-have-to-be-added-to-book-profits-for-s-115jb/>
* 33 DTR 59 where even *profits not credited to the P&L A/c were held
includible in Book Profits*. *Growth
Avenue<http://itatonline.org/archives/index.php/growth-avenue-securities-vs-dcit-itat-delhi-even-exempt-capital-gains-are-includible-in-book-profits>
* approved. *Sutlej Cotton
Mills<http://www.itatonline.org/f/o.php?url=http://www.indiankanoon.org/doc/1871437/>
* 45 ITD 22 (Cal) (SB) which held that exempt capital gains had to be
reduced from book profits was held not to be good law.
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