Section 115JB – An item of receipt which does not fall under the definition of “income” at all and hence falls outside the purview of the computation provisions of Income-tax Act cannot also be included in “book profit” u/s. 115JB of the Act.
Facts
The assessee company, engaged in the business of development and leasing of commercial complexes and rehabilitation of buildings under Slum Rehabilitation Scheme held a parcel of land as its capital asset and the said land was attached with development rights/FSI. The development rights/FSI attached to a portion of the said land were transferred by the assessee to its subsidiary company. In view of the provisions of section 47(iv) being applicable, to the assessee company, the capital gains arising on the said transfer to its subsidiary company were not included in the total income of the assessee company.
While computing the `book profit’ u/s. 115JB also, the assessee company did not offer the said amount on the ground that since the said amount was not income it did not come within the purview of section 115JB. The assessee had attached a note in the Notes forming part of accounts explaining therein that the profits arising on transfer of capital asset to its subsidiary company is, in its opinion, not coming within the purview of section115JB.
The Assessing Officer (AO) did not agree with the contentions of the assessee and he included the amount of profit on transfer of development rights in the `net profit’ for the purpose of computing `book profit’ u/s. 115JB of the Act.
Aggrieved, the assessee preferred an appeal to CIT(A). The CIT(A) upheld the order of the AO.
Aggrieved, the assessee preferred an appeal to the Tribunal where it contended that the profit and loss account should be read along with the Notes forming part of accounts and the net profit should be understood as the net profit show in the profit and loss account as adjusted by the Notes given in the notes to accounts. It was also contended that since the profit arising on transfer of a capital asset by a company to its wholly owned subsidiary company is not treated as income u/s. 2(24) and since it does not enter into computation provision at all under the normal provision of the Act, the same should not be considered for the purpose of computing book profit u/s. 115JB.
Held
The Tribunal observed that in the instant case the assessee has disclosed an item of income in the profit and loss account, but claimed that the same should be excluded by referring to the Notes to accounts. However, the principle, that the profit and loss account should be read along with Notes to accounts should be applied uniformly in all kind of situations and, hence, due adjustment needs to be done for the effect of items disclosed in the Notes to accounts. The Tribunal held that there is merit in the contention of the assessee that the notes given to Notes to accounts should be read along with the profit and loss account. Hence, the net profit shown in the profit and loss account should be adjusted with the items given in Notes to accounts, meaning thereby, the profits arising on sale of capital asset to its wholly owned subsidiary company should be excluded from the net profit and the net profit so arrived at should be considered as `net profit as shown in the profit and loss account’ used in Explanation I to section 115JB. Clause (ii) of Explanation 1 to section 115JB specifically provides that the amount of income to which any of the provisions of section 10(other than the provisions contained in clause (38) thereof) is to be reduced from net profit, if they are credited to the profit and loss account. The logic of these provisions, is that an item of receipt which falls under the definition of `income’ is excluded for the purpose of computing `book profit’, since the said receipts are exempted under section 10 while computing total income. Thus, it is seen that the Legislature seeks to maintain parity between the computation of `total income’ and `book profit’, in respect of exempted category of income. If the said logic is extended further, an item of receipt which does not fall under the definition of `income’ at all and, hence, falls outside the purview of the computation provisions of the Income tax Act, cannot also be included in `book profit’ u/s. 115JB.
This ground of appeal filed by the assessee was allowed.
