Even if a sum is credited to the Profit and Loss account, an assessee can seek its exclusion for “book profits”
Date of Hearing:
The hearing was concluded on 12.6.2015 and the judgment was pronounced on 19. 8.2015.
The main ground of appeal raised by the appellant:
The main ground of appeal raised by the appellant was whether the profit arising out of transfer of development rights of a company to its wholly subsidiary company should be included in the book profit under section 115JB of the Income Tax Act, 1961 or not.
Facts and circumstances of the case:
The assessee preferred the said appeal against the order dated 31.01.2012 passed by Ld CIT (A)-18, Mumbai relating to the assessment year 2009-10.
The assessee company was engaged in development business and in leasing of Commercial Complexes and Rehabilitation of buildings under Slum Rehabilitation Scheme. The assessee was formed on 24.3.2008 through the conversion of an earlier partnership firm into a company under the Companies Act, 1956.
The assessee also owned an Indian subsidiary company under the name and style “SVI Realtors Private Limited”. The assessee owned a piece and parcel of land measuring about 61,506/- sq. meter as its capital asset and the same was attached with development rights.
The assessee transferred the said development rights which were available on a land measuring 19,423 sq.mts to its subsidiary company viz., SVI Realtors Pvt. Ltd. The said transfer gave rise to a Long Term Capital Gain of 300.68 crores.
The assessee stated the same as “Extra Ordinary Income” in its profit and loss account. Under section 47(iv) of the Act, the transfer of a capital asset by a company to its subsidiary company is not considered as “transfer” as such, the Capital gain arising was not chargeable to tax as per section 45 of the Act.
In the instant case, there was no dispute that section 47(iv) of the Act applied to the transfer made by the assessee to its subsidiary company for which the gain of Rs.300.68 crores was not considered as “Capital gains” under section 45 of the Act at the time of computing total income under the Act.
As the assessee was a company, section 115JB applied to it. The assessee did not offer the said amount of Rs.300.68 crores at the time of computing the “book profit” under section 115JB of the Act as the company acquired a surplus over cost of acquisition of assets held by it amounting Rs.300.24 crores.
The profit was a capital receipt and a transaction was not a transfer under the Income Tax Act, as such it did not come within the scope of Section 115JB.
The Assessing Officer did not agree with the assessee and accordingly included the said amount as part of “net profit” for computing the “book profit” under the section 115JB of the Act.
The ld. CIT (A) noticed that a similar issue was considered by the Hyderabad Bench of the Tribunal in Rain Commodities Ltd vs. DCIT (2010) (40 SOT 265; 131 TTJ 514). In the said case the assessee acquired a gain of Rs. 99.42 crores on transfer of assets to its wholly subsidiary company and the assessee claimed that the amount was exempt under section 47(iv) of the Act.
The bench took the view that the amount cannot be excluded from the net profit as the Explanation to section 115JB does not specifically provide for such exclusion while computing the book profit.
Accordingly, the Ld. CIT (A) upheld the order of the Assessing Officer by following the judgment of the Special Bench.
Being aggrieved, the assessee filed the appeal before the Income Tax Appellate Tribunal at Mumbai.
Arguments of both the sides:
The ld. Counsel appearing on behalf of the assessee submitted that the decision of the Special Bench of Tribunal in Rain Commodities Ltd. was not applicable to the facts of the instant case.
The Ld. Counsel appearing on behalf of the Revenue submitted that the Special bench specifically observed that the capital gains in the hands of assessee was included in the profit and loss account and it accepted that the accounts have been prepared according to Part II and Part III of Schedule VI to the Companies Act. It was submitted that the Special bench specifically observed that the assessee did not clarify anything regarding the same in the Notes to accounts and based on the said facts, it was held that the profit arising out of the transfer of capital assets to a subsidiary company cannot be excluded while computing book profit.
The Ld A.R also submitted that as the assessee did not comment about such inclusion in the Notes of accounts but claimed deduction while computing “Book Profit” under section 115JB of the Act, the Special Bench held that the assessee cannot claim exclusion of the amount of gain from net profit for computing book profit under section 115JB of the Act.
The ld. Counsel appearing on behalf of the assessee submitted that the assessee took a stand that the impugned profit should not included in the net profit for section 115JB of the Act and attached a specific note in the “Notes to accounts” stating that the gains is not includible in the book profit.
The ld. Counsel further submitted that the Notes were a part of accounts should be read along with the profit and loss account.
The ld.AR placed reliance on the judgment passed in the case of CIT vs. Sain Processing and Weaving Mills (P.) Ltd. (2010) 325 ITR 565 (Delhi) and the judgment passed in the case of K.K. Nag Ltd. vs. Additional Commissioner of Income Tax [2012] 52 SOT 381 (Pune).
The judgment:
The Bench heard the rival contentions and perused the documents and record. It was held that there was no dispute that the profit arising out of transfer of a capital asset by the assessee to its subsidiary company was not assessed as “Capital Gain” at the time of computing total income under the Act. The provisions of section 115JB would apply only if the tax payable normally by an assessee is less than the prescribed percentage of “book profit”.
The expression “Book Profit” is defined in section 115JB of the Act. It denotes the net profit shown in the profit and loss account for the relevant previous year prepared under the Companies Act reduced by the items in the Explanation.
It was held that that the issues require fresh examination. Accordingly the order of Ld. CIT (A) was set aside and the case was restored to the file of the AO with the direction to re-examine the issues by considering all the contentions of the assessee.
As a result, the appeal filed by the assessee was allowed.