Company – Book profits – Capital gains – Sections 45, 48, 115JB – Computation of book profits u/s 115JB – Scope of section 115JB – Indexed cost of acquisition to be taken into account in calculating capital gains

18. Best Trading and Agencies Ltd. vs. Dy.
CIT [2020] 428 ITR 52 (Kar.) Date of order: 26^th August, 2020 A.Ys.: 2005-06 & 2006-07

Company – Book profits – Capital gains –
Sections 45, 48, 115JB – Computation of book profits u/s 115JB – Scope of
section 115JB – Indexed cost of acquisition to be taken into account in
calculating capital gains

The assessee
company was utilised as a special purpose vehicle (SPV) for restructuring of
‘K’. Under an arrangement approved by the court, the surplus on
non-manufacturing and liquid assets including real estate had been transferred
to the SPV for disbursement of the liabilities. In the relevant years the A.O.
invoked the provisions of section 115JB and assessed the assessee on book
profits without giving the benefit of indexation on the cost of the capital
asset sold during the year.

The Tribunal upheld
the order of the A.O.

The Karnataka High
Court allowed the appeal filed by the assessee and held as under:

‘i)    Section 115JB deals with computation of book
profits of companies. By virtue of sub-section (5) of section 115JB, the
application of other provisions of the Act is open, except if specifically
barred by the section itself. The indexed cost of acquisition is a claim
allowed by section 48 to arrive at the income taxable as capital gains. The
difference between the sale consideration and the indexed cost of acquisition represents
the actual cost of the assessee, which is taxable u/s 45 at the rates provided
u/s 112. There is no provision in the Act to prevent the assessee from claiming
the indexed cost of acquisition on the sale of the asset in a case where the
assessee is subjected to section 115JB.

ii)    Since the indexed cost of acquisition was
subjected to tax under a specific provision, viz., section 112, the provisions
of section 115JB which is a general provision, could not be made applicable to
the case of the assessee. Also, considering the profits on sale of land without
giving the benefit of indexed cost of acquisition results in taxing the income
other than actual or real income. In other words, a mere book-keeping entry
cannot be treated as income. The assessee had to be given the benefit of
indexed cost of acquisition.’