S. 115JB — Long-term capital gain which is exempt u/s.47(iv) cannot be excluded from the book profits for the purpose of S. 115JB.

The assessee credited an amount of Rs.149.77 crores as profit
on transfer of assets to its wholly-owned subsidiary to its profit & loss
account. It claimed the exemption u/s.47(iv) of the Act. While working out the
book profits for the purpose of S. 115JB, the assessee reduced this profit and
claimed that it cannot form part of the book profits. A Special Bench was
constituted to adjudicate the matter.

The AO has power to alter the net profits as shown in the P &
L A/c only in two cases; (1) if it is discovered that P & L A/c is not drawn up
in accordance with Part II and Part III of Schedule VI of the Companies Act, (2)
if accounting policies, accounting standards are not adopted for preparing such
accounts and methods, rates of depreciation which have been incorrectly adopted
for preparation of P & L A/c laid before the annual general meeting.

Part II & Part III of Schedule VI of the Companies Act
require the P & L A/c of a company 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. As held by the Bombay
High Court in the case of CIT v. Veekaylal Investment Co. (P) Ltd., 249 ITR 597,
the capital gain should be included for the purposes of computing book profits
under MAT provisions.

It is an undisputed fact that the long-term capital gain
earned by the assessee is included in the net profit determined as per P & L A/c
prepared as per Part II and Part III of Schedule VI of the Companies Act. It is
not the case of the assessee that the capital gain earned by the assessee was
not included in the net profit determined as per P & L A/c of the assessee
prepared under the Companies Act. The taxability of capital gain is relevant
only for the purpose of computation of income under the normal provisions of the
Income-tax Act, and has nothing to do with the preparation of P & L A/c in
accordance with the provisions of Part II and Part III of Schedule VI of the
Companies Act. Under these circumstances, as long as long-term capital gain is
part of profit included in the P & L A/c prepared in accordance with the
provisions contained in Parts II and III of Schedule VI of the Companies Act, it
cannot be excluded from the net profit unless so provided under Explanation to
S. 115JB for the purpose of computing book profit. In the absence of any
provision for exclusion of capital gains in the computation of book profit under
the above provision, the assessee is not entitled to the exclusion claimed. The
decision of the Calcutta Special Bench of the Tribunal in the case of Sutlej
Cotton Mills Ltd. v. ACIT, 45 ITD 22 held to be reversed by the decision of the
Bombay High Court in the case of Veekaylal Investment Co. (P) Ltd. (supra).

The Ss.(5) of S. 115JB provides that “save as otherwise
provided in this Section, all other provisions of this Act shall apply to every
assessee, being a company, mentioned in this Section”. The contention of the
assessee that since all other provisions of this Act shall also apply, it is
entitled to reduce the long-term capital gain exempted u/s.47(iv) is not
accepted. All other provisions of the Act shall apply, but subject to the
provisions otherwise provided in S. 115JB. The provision for computing book
profit by increasing or reducing the net profit as shown in the P & L A/c
prepared in accordance with the provisions of Part II and Part III of Schedule
VI of the Companies Act are specifically provided in S. 115J or S. 115JA or S.
115JB itself, as the case may be, and consequently all other provisions of the
Act providing the manner of computation of total income under normal provisions
of the Act cannot be applied while computing book profit u/s.115J or u/s.115JA
or u/s.115JB, as the case may be. The decision of ITO v. Frigsales (India) Ltd.,
4 SOT 376 (Mum.) is overruled.