Unless and until gift is connected with profession or avocation, it cannot be ta

Unless and until gift is connected with profession or avocation, it cannot be taxed

In the absence of link or connection between the gift made by the devotees and the profession or avocation carried on by the assessee, a religions head, the personal gift cannot be termed as income taxable under the Act


[2010] 6 taxmann.com 87 (Mad.)
HIGH COURT OF MADRAS
CIT   v. Gopala Naicker Bangaru
TAX CASE APPEAL NO. 308 OF 2009
JULY 21, 2010

FACTS

As per the profile submitted by the Respondent/Assessee, he was born on 3-3-1941 at Melmaruvathur Village, Kanchipuram District and during his childhood, Goddess Adhiparasakthi frequented in his dreams to make it known that she wanted him to build a temple and use it to alleviate the sufferings of humanity. The devotees are believing that the Assessee is believed to be an Avatar and incarnation of Goddess Adiparasakthi. The Assessee's Oracles and Miracles attract millions of devotees from all over the world who come to Melmaruvathur to seek his blessings. The devotees calling him as `Amma' and he is rendering tireless serves to the mankind irrespective of caste, creed, colour, religion, economic status and integrity.

The devotees of the Assessee come and make their offerings for contribution voluntarily to him at the time of his birthday and the same has been accounted as capital receipts and receipts have also been issued. Thus, the Assessee is performing religious practice for the benefit of mankind.

According to the Revenue, the Assessee filed his Return of Income for the assessment year 2004-05 declaring taxable income of Rs.5,23,680/- and the same was accepted under section 143(1) of the Income-tax Act. On scrutiny of the Balance-sheet, it has been revealed that an amount of Rs.1,75,70,347/- was received as gifts during that year and was shown as capital receipts.

The Assessing Officer during the course of assessment, treated the gifts as having nexus to his profession as a religious head and hence, brought the entire income within the net of tax and vide assessment order dated 5-11-2007 under section 143(3) r/w section 147 of the Income-tax Act, 1961 and credited the above said gift as professional income and held that the Assessee is liable to pay a sum of Rs.75,56,439/- as Income-tax. It is also indicated in the said order that penalty proceedings under Section 271(1)(c) are being initiated separately.

HELD


The Respondent/Assessee as a religious head, is not involving himself in any profession or avocation and also not performing any religious rituals/poojas for his devotees for some consideration or other. In fact the Respondent/Assessee is doing charitable work and spiritualization and made his devotees to follow the same for the benefit of mankind.

The devotees out of natural love and affection and veneration used to assemble in large numbers on the birthdays of the Assessee and voluntarily made gift, and at any stretch of imagination it cannot be said that the amount received by the Respondent by way of gift would amount to vocation or profession. It is not the case of the department that the devotees were compelled to make gift on the occasion of the birthday of the Respondent/Assessee. The facts of the present case would disclose that the amount/gift received by the Respondent/Assessee cannot said to have any direct nexus with any of his activities as a religious person/Head.

The Commissioner of Income-tax(Appeals) as well as the Income-tax Appellate Tribunal held that simply because the Respondent/Assessee practicing ritualism while leading normal family life, cannot said to be carrying on any profession or vocation and that no link has been established between the receipt received on the occasion of the birthday and so called vocation carried on by the Assessee.

The decisions reported in 171 ITR 447 (Mad.), Commissioner of Income-tax vs. Mr.Balamuralikrishnan, 160 ITR 534 C.P.Chitrarasu vs. Commissioner Income-tax, Madras, 231 ITR 632 Commissioner Income-tax vs. Sri Vanamamalai Ramanuja Jeer Swamigal, the facts of which have been discussed in detail by this Court in the earlier paragraphs, are squarely applicable to the facts of this case, for the reason that the gifts made by the followers are voluntary in nature which are neither income nor capital in the hands of the Assessee. It has been further held in those decisions that unless and until the gift is connected with the profession or avocation, it cannot be taxed and in the absence of link or connection between the gift made by the devotees and the profession or avocation carried on by the Assessee, the personal gift cannot be termed as income taxable under the Act. It is pertinent to point out at this juncture, in the Respondent / Assessee's own case in Assessment year 1988-89, the Department has accepted the position that gifts received by him on birthdays and other occasions were not taxable. In the decision reported in 193 ITR 321 (SC) Radhasoami Satsang vs. Commissioner of Income-Tax, it has been held that -

"Where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent years."

Since, there is no change in facts and law in the present case, the reasons assigned by the Income-tax Appellate Tribunal are correct and this Court finds no infirmity or error apparent on the face of record in the impugned order.

________JUDGMENT__________


M.SATHYANARAYANAN, J


The Revenue has preferred this Appeal under Section 260-A of the Income-tax Act, 1961 challenging the vires of the order dated 17.10.2008 passed by the Income-tax Appellate Tribunal `C' Bench, Chennai, made in I.T.A 588/Mds./2005.

2. This appeal was admitted on the following substantial questions of law:-

1. Whether on the facts and circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the gifts received on Assessee's birthday of Rs.1,75,70,347/- as Capital Receipt and having no nexus with his profession as vocation of religious practice is valid?

2. Whether on the facts and circumstances of the case, the Income-tax Appellate Tribunal was right in saying that the reopening under Section 147 of the Income-tax Act, on mere surmise, even though the assessment was reopened within 4 years with valid reasons from the end of the assessment year and hence no proviso to Section 147 will apply to the facts of this case?:

3. The facts leading to the filing of this appeal are as follows:-

As per the profile submitted by the Respondent/Assessee, he was born on 03.03.1941 at Melmaruvathur Village, Kanchipuram District and during his childhood, Goddess Adhiparasakthi frequented in his dreams to make it known that she wanted him to build a temple and use it to alleviate the sufferings of humanity. The devotees are believing that the Assessee is believed to be an Avatar and incarnation of Goddess Adiparasakthi. The Assessee's Oracles and Miracles attract millions of devotees from all over the world who come to Mel Maruvathur to seek his blessings. The devotees calling him as `Amma' and he is rendering tireless serves to the mankind irrespective of caste, creed, colour, religion, economic status and integrity.

4. The devotees of the Assessee come and make their offerings for contribution voluntarily to him at the time of his birthday and the same has been accounted as capital receipts and receipts have also been issued. Thus, the Assessee is performing religious practice for the benefit of mankind.

5. According to the Revenue, the Assessee filed his Return of Income for the assessment year 2004-2005 declaring taxable income of Rs.5,23,680/- and the same was accepted under Section 143(1) of the Income-tax Act. On scrutiny of the Balance-sheet, it has been revealed that an amount of Rs.1,75,70,347/- was received as gifts during that year and was shown as capital receipts.

6. The Assessing Officer during the course of assessment, treated the gifts as having nexus to his profession as a religious head and hence, brought the entire income within the net of tax and vide assessment order dated 5.11.2007 under Section 143(3) r/w Section 147 of the Income-tax Act, 1961 and credited the above said gift as professional income and held that the Assessee is liable to pay a sum of Rs.75,56,439/- as Income-tax. It is also indicated in the said order that penalty proceedings under Section 271(1)(c) are being initiated separately.

7. The Assessee/Respondent herein aggrieved by the Assessment Order passed by the Assistant Commissioner of Income-tax Circle I, Tambaram, Chennai-45, has preferred appeal before the Commissioner of Income-tax (Appeals), Chennai in I.T.A No.97/07-08. The Commissioner of Income-tax (Appeals) vide order dated 9.1.2008, has set aside the order passed by the Assistant Commissioner of Income-tax Circle-I, on the ground that the amounts received by the Assessee are gifts and they are not consideration for profession/vocation. The Commissioner of Income-tax (Appeals) has also considered the decision reported in 231 ITR page 632 (Mad.) Commissioner of Income Tax vs. Sri.Vanamamalai Ramanuja Jeer Swamigal for arriving at such a finding and allowed the appeal filed by the Assessee.

8. The Department/Revenue aggrieved by the order passed by the Commissioner of Income Tax (Appeals), had preferred further appeal before the Income Tax Appellate Tribunal `C' Bench, Chennai in I.T.A.No.588/Mds./2005 for the assessment year 2004-2005.

9. The appellate Tribunal after taking into consideration the rival submissions and considering the various decisions cited before him, vide order dated 17.10.2008, has dismissed the appeal on the ground that that the gifts received by the Assessee, have no direct nexus with any of his activities and it is squarely covered by the decision cited supra (231 ITR page 632). The Revenue aggrieved by the order of dismissal of the appeal passed by the Income Tax Appellate Tribunal `C' Bench, Chennai, had preferred this appeal.

10. Mr.J.Nareshkumar, learned Senior Standing Counsel appearing for the Income Tax Department/appellant, has submitted that but for the fact the Assessee is a religious leader, and that his profile also states that he is performing Oracles , the devotees would not have made gifts to him.

11. It is further submitted by the learned senior standing counsel appearing for the appellant that the Assessee is admittedly living with his family and keeping the amount in his bank account and it was also shown in his Wealth Tax Returns filed for the Assessment year 2005-2006. It is the further submission of the learned senior standing counsel appearing for the appellant, the Assessee has not offered any proper explanation as to why gifts/donations received from his devotees were deposited in his individual bank account and even though two charitable trusts are run by him, the Assessee has not deposited the donations in the accounts of the trust. Therefore, the learned senior standing counsel appearing for the appellant would submit that in the absence of any supporting material produced by the Assessee that it is a capital receipt, the Assessing Officer on a careful consideration of the materials available on record, has rightly arrived at a finding that it is liable to be taxed and consequently levied tax on the said income with liberty to proceed under Section 271(1)(c) by way of penalty proceedings. It is the further submission of the learned senior standing counsel appearing for the Department that the Commissioner of Income Tax (Appeals) as well as the Tribunal had failed to take into consideration the said vital aspects and by placing reliance upon the decisions which are not applicable to the facts of the case, had upheld the claim of the Assessee and therefore, the impugned order passed by the Tribunal confirming the order passed by the Commissioner of Income Tax (Appeals) is liable to be set aside.

12. Learned senior standing counsel appearing for the appellant in order to buttress his submissions, has placed reliance upon the following decisions:-

i. 35 ITR 48 (SC) - Krishna Menno (P) vs. Commissioner of Income-tax

ii. 34 ITR 92 (Bombay) Govindlalji Ranchhodalalji (Maharaj Shri) vs. Commissioner of Income-tax

iii. 156 ITR 412 (SC) George Thomas (K.) (Dr.) vs. Commissioner of Income-tax

iv. 176 ITR 78 (Kerala) Father Epharam vs. Commissioner of Income-tax

v. Unreported Judgment dated 16.12.2008 in W.P.Nos.15527 to 15537 of 2003

13. In 35 ITR 48 (SC) - Krishna Menon (P) vs. Commissioner of Income-tax, the Assessee after his retirement as a Superintendent of Police, spending his time in studying Vedanta Philosophy and expounding the same to such persons. He soon gathered a number of disciples. One of the disciples had transferred the entire balance outstanding in his account to the credit of the Assessee and the said amount was the subject matter of assessment. The Income-tax Officer had assessed the said income as a taxable income and the Assessee preferred an appeal before the Assistant Commissioner who dismissed the appeal. The Assessee's appeal to Appellate Tribunal has also ended in dismissal and hence further appeal was preferred before the High Court of Bombay which has also ended in dismissal. The Assessee filed appeal before the Hon'ble Supreme Court of India. The Hon'ble Supreme Court on the facts, found that the Assessee was teaching his disciples Vedanta, without any motive or intention of making profit out of such activity and that teaching of Vedanta by the Assessee can properly be called the carrying on of a vocation by him. The Supreme Court held that the importing of the teaching was the cause causans of the making of the gift and that the payments with which were income arising from the vocation of the appellant as a teacher of Vedanta, no question of exemption under Section 4(3)(vii) of the Act arises. The Supreme Court citing the said reasons has dismissed the appeal filed by the Assessee.

14. In 34 ITR 92 (Bombay) Govindlalji Ranchhodalalji (Maharaj Shri) vs. Commissioner of Income-tax, the Assessee is a direct descendant of Shri Vallabhacharyaji who founded the faith known as `Vallabh Sampradaya' Maharaj Shri is not a sanyasi and he has married and has children. He is succeeded by his sons who inherit and divide the properties. The Assessee keeps an idol of Lord Krishna in his house and the offerings are made to the Assessee. The authorities below held that the Assessee therein was carrying on a vocation and the Assessee aggrieved by the same, preferred an appeal to the High Court of Bombay. The Bombay High Court held that even practice of religion can become a vocation and more so, when it brings in a steady income. Therefore, the Bombay High Court upheld the claim of the Department that the Assessee was rightly assessed to tax as income.

15. In 156 ITR 412 (SC) George Thomas (K.) (Dr.) vs. Commissioner of Income-tax, the Assessee was a lecturer in a college and he associated himself wit the Indian Gospel Masson in the USA, which collected money for its working abroad through the Indian Christian Crusade. On returning to India, the Assessee was propagating the ideals of the Indian Christian Crusade and was engaging in a movement for the spread of religion etc., and he also started publishing a daily newspaper. The income of the Assessee was subjected to tax and challenge made by the Assessee before the authorities below had ended in futile before the High Court of Kerala also. Hence, the Assessee preferred an appeal before the Hon'ble Supreme Court of India.

16. The Hon'ble Supreme Court of India in the decision held that there was a link between the activities of the appellant and the payments received by him and the link was close enough and that the appellant got receipts on account of carrying on of his vocation and they were not casual and non-incurring receipts. The Hon'ble Supreme Court of India citing the said reasons, has upheld the case of the Department that the incomes were taxable.

17. In 176 ITR 78 (Kerala) Father Epharam vs. Commissioner of Income-tax, the Assessee was a Priest in a Monastery and he received substantial foreign remittances and the surplus amount that remained after distribution to various other Priests for performing the mass, was treated as the income of the Assessee and was taxed. The Assessee challenged the imposition of tax, and lost before the authorities and hence he preferred further appeal to High Court of Kerala. The High Court of Kerala held that there was a close and intimate link between the occupation or avocation of the Assessee and the payments received by him and based on the said reason, dismissed the appeal filed by the Assessee.

18. Similar view was taken in the unreported judgment dated 16.12.2008 made in W.P.Nos.15527 to 15537 of 2003.

19. The learned senior standing counsel appearing for the appellant/Department by placing strong reliance on the above cited decisions would submit that but for the fact the Assessee/Respondent herein is a religious leader, he would not have received gifts and hence there is a close and intimate link between the activities/avocation of the Assessee and the payments received by him and therefore, it was rightly taxed by the Assessing Officer and it was erroneously reversed by the Commissioner of Income-tax (Appeals) and the Appellate Tribunal and hence the learned standing counsel appearing for the appellant praying for the setting aside of the order passed by the Tribunal and to confirm the order passed by the Assessing Officer.

20. Per contra Mr.V.Ramachandran, learned senior counsel appearing for M/s.P.Sivagnanam and A.S.Balaji, learned counsel appearing for the Respondent / Assessee would submit that the Commissioner of Income-tax (Appeals) as well as the Appellate Tribunal had rendered a clear and categorical finding that there was no nexus between the receipt of the birthday gifts and the exercise of any profession or vocation by the Assessee and that the gifts were voluntarily made by the devotees on account of personal esteem and veneration and therefore, the said finding cannot be disturbed. It is further submitted by the learned senior standing counsel appearing for the appellant that the assessee's own case in Assessment year 1988-89, the Department has accepted his case after due enquiry and that the gifts received by the Respondent herein on birthdays and other occasions were not taxable. The learned senior counsel appearing for the Respondent in support of his submissions, though relied upon number of decisions, it will be useful to refer to the following decisions:-

1. 171 ITR 447 (Mad.) Commissioner of Income-tax vs. Mr.Balamuralikrishna.

2.160 ITR 534 C.P.Chitrarasu vs. Commissioner Income-tax, Madras.

3.231 ITR 632 Commissioner Income-tax vs. Sri Vanamamalai Ramanuja Jeer Swamigal.

In all the said decisions the judgment of the Hon'ble Supreme Court of India reported in 35 ITR 48 Krishna Menon vs. Commissioner of Income-tax has been referred.

21. 171 ITR 447 (Mad.) Commissioner of Income-tax vs. Mr.Balamuralikrishnan, the Assessee is a Musician by profession and he claimed a sum of Rs.30,000/- given to him by his fans in appreciation of his completing 30 years of service rendered to Carnatic Music as exempted from tax. The Income Tax Officer treated the said income as professional income and levied tax. The Assessee preferred appeal and the Appellate Authority held that the said payment was received by way of a testimonial or personal gift and not taxable and the said view was also upheld by the Tribunal and hence the Department taken up the matter for further appeal before this Court. A Division Bench of this Court by placing reliance upon 35 ITR page 48 (SC) (Krishna Menon's case), 114 ITR page 253 (Mad) S. A. Ramakrishnan vs. CIT and other decisions, has held that though the Assessee is an artist by profession, there is no direct nexus between this payment and his vocation though it may not be denied that there is an indirect connection between the two. The payment received by the Assessee from his fans, was expression of their good will and hence the said amount cannot be said to have been paid to him by way of remuneration for those services Citing the said reasons, this Court in the said decision, has upheld the claim of the Assessee and dismissed the appeal preferred by the Income-tax Department.

22. In 160 ITR 534 C.P.Chitrarasu vs. Commissioner Income-tax, Madras, the Assessee was an active member of a political party and held various offices. A committee consisting of the party men of that party had collected donations from the members of the party, businessmen and public and also arranged a drama for the purpose of donating a purse and the same was donated to the Assessee. The Income-tax Officer held that a sum of Rs.51,000/- out of the amount given to the Assessee by his admirers, would constitute income received by the Assessee in the course of his vocation as a politician and therefore, it was taxable. The Assessee was successful before the authorities below and hence the Revenue preferred the said appeal before this Court. A Division Bench of this Court after taking into consideration the factual aspects and the decisions cited before it, held that the presentation of Rs.51,000/- to the Assessee amounted to windfalls or gift for his personal qualities, though his profession or vocation as a politician. This Court further held that no materials placed before the lower authorities by the Revenue that the presentation of Rs.51,000/- to the Assessee will amount to a receipt arising from the exercise of a profession or vocation or occupation and therefore, for the said reasons, the appeal preferred by the Revenue was dismissed.

23. In 231 ITR 632 Commissioner Income-tax vs. Shri Vanamamalai Ramanuja Jeer Swamigal, the Assessee namely Shri Vanamamalai Ramanuja Jeer Swamigal, Nanguneri, Tirunelveli District, received amounts by way of Kanikkai and Sambhavanai amounting to a sum of Rs.12,156/-. The question arose was whether the said amount was assessable as income-tax under the Income-tax Act, for the assessment year 1974-75. The Tribunal held that the said presentation was out of personal regard, personal esteem and veneration for Swamigal and did not constitute income from the exercise of any profession or vocation and that there was no evidence to show that Swamiji had been exercising any profession or vocation. The Revenue preferred appeal before this Court and it was contended that any amount brought by his followers would amount to income assessable to tax under the Income-tax Act. A Division Bench of this Court in the said decision, has taken into consideration the Krishna Menon s case reported in 35 ITR 48 (SC) and other decisions, held that Kanikkai and Sambhavanai were paid by the devotees to the Jeer Swamigal out of personal regard, esteem and veneration and that the Swamigal is not exercising any profession or avocation and the voluntary offerings made by the devotees are not on account of any profession or vocation. This Court for the said reasons, has held that the said offerings will not be considered as income under the Income-tax Act and therefore, dismissed the appeal preferred by the Revenue.

24. Learned senior counsel appearing for the Respondent/Assessee would submit that the decision reported in 231 ITR 632 (Mad.) is squarely applicable to the facts of the case and further that the Commissioner of Income-tax (Appeals) as well as the Income-tax Appellate Tribunal had upheld the case of the Respondent by rendering concurrent findings. It is further submitted that no substantial questions of law arose for consideration in this appeal and hence prayed for dismissal of this appeal.

25. This Court has carefully considered the submissions made by the learned senior standing counsel appearing for the appellant and the learned senior counsel appearing for the Respondent and also the decisions relied on by the respective counsel.

26. The Religion is a matter of faith stemming from the depth of the heart and mind and is a belief which binds the spiritual nature of men to super natural being. Devotion is a consecration and denotes an act of worship. Faith, in the strict sense constitutes firm reliance on the truth of religious doctrines in every system of religion and religion, faith or devotion is not easily interchangeable. Religion has reference to one s views of his relations to his Creator, and to the obligations they impose of reverence for his being and character, and of obedience to his will.

27. The profile of the Respondent/Assessee would indicate that Goddess Adhiparasakthi frequented in his dreams to make it known that she wanted to build a temple and use it to alleviate the sufferings of humanity and accordingly the Respondent / Assessee has built a temple which is also known as `Sakthi Peedam'. The devotees on important occasions, used to throng the temple and as per the practice prevails in the temple, the devotees irrespective of their gender, can perform poojas and Abishegams to the presiding deity namely Goddess Parasakthi. The above said practice of devotees performing Abishegams and poojas to the presiding deity is not prevalent in the State and therefore out of love and affection and veneration, they used to assemble in great numbers on the eve of the birthday of the Respondent/Assessee and offer gifts.

28. It is to be pointed out at this juncture that the Respondent/Assessee as a religious head, is not involving himself in any profession or avocation and also not performing any religious rituals/poojas for his devotees for some consideration or other. In fact the Respondent/Assessee is doing charitable work and spiritualization and made his devotees to follow the same for the benefit of man kind.

29. The devotees out of natural love and affection and veneration used to assemble in large numbers on the birthdays of the Assessee and voluntarily made gift, and at any stretch of imagination it cannot be said that the amount received by the Respondent by way of gift would amount to vocation or profession. It is not the case of the department that the devotees were compelled to make gift on the occasion of the birthday of the Respondent/Assessee. The facts of the present case would disclose that the amount/gift received by the Respondent/Assessee cannot said to have any direct nexus with any of his activities as a religious person/Head.

30. The Commissioner of Income-tax (Appeals) as well as the Income-tax Appellate Tribunal held that simply because the Respondent/Assessee practicing ritualism while leading normal family life, cannot said to be carrying on any profession or vocation and that no link has been established between the receipt received on the occasion of the birthday and so called vocation carried on by the Assessee.

31. The decisions relied on by the learned senior standing counsel appearing for the appellant/Department have no application to the facts of the present case as in those cases, Courts held that the activities of the concerned Assessees would amount to vocation and object of which, is to make a profit and also amount to revenue receipt.

32. The decisions reported in 171 ITR 447 (Mad.) Commissioner of Income-tax vs. Mr.Balamuralikrishnan, 160 ITR 534 C.P.Chitrarasu vs. Commissioner Income-tax, Madras, 231 ITR 632 Commissioner Income-tax vs. Sri Vanamamalai Ramanuja Jeer Swamigal, the facts of which have been discussed in detail by this Court in the earlier paragraphs, are squarely applicable to the facts of this case, for the reason that the gifts made by the followers are voluntary in nature which are neither income nor capital in the hands of the Assessee. It has been further held in those decisions that unless and until the gift is connected with the profession or avocation, it cannot be taxed and in the absence of link or connection between the gift made by the devotees and the profession or avocation carried on by the Assessee, the personal gift cannot be termed as income taxable under the Act. It is pertinent to point out at this juncture, in the Respondent / Assessee's own case in Assessment year 1988-89, the Department has accepted the position that gifts received by him on birthdays and other occasions were not taxable. In the decision reported in 193 ITR 321 (SC) Radhasoami Satsang vs. Commissioner of Income-Tax, it has been held that -

"Where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent years."

Since, there is no change in facts and law in the present case, the reasons assigned by the Income Tax Appellate Tribunal are correct and this Court finds no infirmity or error apparent on the face of record in the impugned order.

33. This Court after taking into consideration the factual as well as the legal aspects is of the considered opinion that the substantial questions of law raised by the Revenue are to be answered in negative against them. Therefore, the appeal is dismissed confirming the order dated 17.10.2008, passed by the Income-tax Appellate Tribunal `C' Bench, Chennai in I.T.A.No.588/Mds/2005. In the circumstances, there will be no order as to costs.

gift under the income tax Act

An attempt is made to highlight some of the salient features of Taxability of Gifts as Income under sections 56(vii) and (viia) of the Income Tax Act, 1961 (`the Act') i.e., mainly gifts received after 1-10-2009.

1.1 The charging section of the Gift Tax Act, 1957 was suspended w.e.f. 1-10-98 to say that Gifts made after 1-10-98 would not be chargeable to Tax. It is a misnomer to state that the Gift Tax Act has been abolished as it is only the Charging Section which has been kept in abeyance. In short it can be revived if the Legislature deems it fit.

The Law On Taxation Of Gifts

CA K. C. Devdas

Clauses (v) to (viia) of s. 56(2) incorporate the law on taxation of gifts. The author, an eminent Chartered Accountant, has meticulously analyzed the provisions of law and identified numerous problems therein. Using his vast experience in the subject, the author has proposed a number of credible solutions as well.

It is doubtful whether basis of valuation for the purpose of stamp duty has been notified by all the State Governments in respect of all the properties, including agriculture land, etc. In case basis for valuation has not been notified for the purpose of stamp duty, the value taken would only be value as is mentioned in the documents registered or the value as would have been adopted by concerned authorities for the purpose of stamp duty
1.2 In order to augment the sources of revenue and as the charging provisions of Gifts Tax Act have been kept in abeyance, the Legislature in its wisdom introduced section 56(2) (v) of Income tax Act, 1961 with effect from 1-4-2005 to state that Gifts received without consideration by an individual or aHUF from any person after 1.9.2004 would be deemed as Income unless it is received from the exempted persons and categories as stated in the Proviso to section 56(2) (v) of the Act. There were amendments to this sub-clause by way of introduction of 56(2) (VI) of the Act with effect from 1-4-2007. Both the sub-clauses covered only Gifts of any sum of money subject to the stipulations laid down therein. In short gifts in kind were not covered under these sub-clauses.

1.3 In order to extend the taxability of Gifts to properties other than cash, sub-clause (vii) was introduced with effect from 1-10-2009 to cover gifts of immovable properties, shares and securities, jewellery, archaeological collections, drawings, paintings, sculpture, any work of art, and bullion (1-6-2010).

1.4 I t is the paper writer's view that taxability of gifts as income which started on a small scale to include only sums of money seems to have spread its net wide enough to include gifts in kind also. The future enactments would further see a plethora of items being added to the definitions of property so that gifts barring few exceptions would be covered under the Act. The Paper writer is reminded of the levy of service tax where it is started as a levy on 5 or 6 items and gradually got extended to over 100 services. The fate of taxability of gifts as income would also be the same and amendments are not far off to say that all gifts would be income except those specifically exempted. The Government is always contemplating to raise revenues and the taxability of gifts as income is very valuable tool. At the same time there would be a lot of litigation on the principles of valuation on the taxability of gifts under the Act like sections 68, 115JB and other vexatious provisions.

1.5 Be that as it may an attempt is made in this paper to highlight some of the features governing gifts covered by clauses (vii) and (viia) to section 56(2) of the Act. 1.6 Section 56(2) (vii) of the Act. The previous provisions of sub-clause (vi) of section 56 provided that any `sum of money' (in excess of the prescribed limited of rupees fifty thousand) received without consideration by an individual or HUF would be chargeable to income-tax in the hands of the recipient under the head `Income from other Sources'. However, receipts from relatives or on the occasion of marriage or under a will were outside the scope of the provisions of clause (vi) of sub-section (2) of section 56 of the Income-tax Act. Similarly, anything which is received in kind having `money's worth', i.e., property also remained outside the purview of these provisions.

Section 47 governs transactions not regarded as transfer and covers distribution of Assets on total or partial partition, Transfer under Will, etc. These exceptions are not covered under the proviso to Section 56(2) (viia) and therefore could it be considered that such transactions would be caught within the mischief of section 56(2)(viia) of the Act? It may also be noted that the gifts received from exempted categories stipulated u/s 56(2)(vii) would not govern gifts u/s. 56(2)(viia) and therefore are to be strictly interpreted
The above section being an anti-abuse measure, has been amended by inserting a new clause (vii) in sub-section (2) to provide that the value of any property would be included in the computation of total income of the recipient as "income from other sources". Such properties will include immovable property being land or building or both, shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures or any work of art. In a case where an immovable property is received without consideration and the stamp duty value of such property exceeds fifty thousand rupees, the whole of the stamp duty value of such property shall be taxed as the income of the recipient.

If the stamp duty value of immovable property is disputed by the assessee, the Assessing Officer may refer the valuation of such property to a Valuation Officer. In such cases, the provisions of existing section 50C and subsection (15) of section 155 of the Income-tax Act shall, as far as may be, apply, for determining the value of such property.

It has been provided that in a case where movable property is received without consideration and the aggregate fair market value of such property exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property shall be taxed as the income of the recipient. If a movable property is received for a consideration which is less than the aggregate fair market value of the property and the difference between the two exceeds fifty thousand rupees, the difference between the fair market value of such property and such consideration shall be taxed as the income of the recipient.

The method for the determination of fair market value of property other than immovable property has been provided in rules 11U and 11UA of Income-tax Rules, 1961.

Consequential amendment has been made in section 2 by inserting sub-clause (xv) in clause (24) thus expanding the definition of income to include any sum of money or value of property referred to in clause (vii) of sub-section (2) of section 56. Further, section 49 has also been amended by way of inserting a new subsection (4) providing that for the purposes of computing capital gains, if the transaction of receipt of the asset is subject to tax under clause (vii) of sub-section (2) of section 56, then the cost of acquisition of the asset shall be the stamp duty value (for immovable property) or fair market value (for asset being a movable property), as the case may be.

These amendments have been made applicable with effect from 1st October, 2009 and will accordingly apply for transactions undertaken on or after such date.

The Finance Act, 2010 amended the definition of Property u/s. 56(2) (vii) of the Act w.e.f. 1-10-2009 to provide that section 56(2)(vii) will have application to the "Property" which is in the nature of a capital asset of the recipient and therefore would not apply to stock-in-trade, raw material and consumable stores of any business of such recipient.

Further clause (vii) of section 56(2) was amended w.e.f. 1-10-2009 to provide that it would apply only if the Immovable Property is received without any consideration (Underlining mine) and to remove the stipulation regarding transactions involving cases of inadequate consideration in respect of Immovable property.

1.7 The Finance Act of 2010 w.e.f. 1-6-2010 has introduced yet another sub-clause to section 56(2) which is numbered as sub-clause (viia) to tax shares of a company, not being a company in which public are substantially interested, received by a firm or a company (Not being a company in which the public are substantially interested). Thus the Taxable assessee's are closely held companies and firms.

The aggregate value of inadequate consideration or absence of consideration should exceed Rs. 50,000/. When the shares are received without consideration or for Inadequate consideration and the lack of consideration is more than Rs. 50,000/-, then the entire amount of shortfall in consideration would be taxable. In case the aggregate shortfall in consideration is less than Rs. 50,000/- no chargeability arises. The method of ascertaining Fair Market Value (`FMV') of shares has been laid down in Rule 11UA(C) of Income Tax Rules, 1962 (`IT Rules'). However, the proviso to clause (viia) clearly provides that this clause shall not apply to any such property received by way of transaction not regarded as Transfer under Clause (via), (vic), (vicb) (vid) or clause (vii) of section 47.

Accordingly shares received on account of the transactions governed of the aforesaid clauses of Section 47 would not be liable to tax. Section 47 governs transactions not regarded as transfer and covers distribution of Assets on total or partial partition, Transfer under Will, etc. These exceptions are not covered under the proviso to Section 56(2) (viia) and therefore could it be considered that such transactions would be caught within the mischief of section 56(2)(viia) of the Act? It may also be noted that the gifts received from exempted categories stipulated u/s 56(2)(vii) would not govern gifts u/s. 56(2)(viia) and therefore are to be strictly interpreted.

2. Having brought out the salient features of amendment made to Section 56(2) (vii) and introduction of clause (viia) to the Act, I would dwell in a nut shell to the provisions of Section 56(2) governing gifts in general in the concept of gifts, related persons, exempted categories, threshold etc.

2.1 Provisions of Section 56(2)(vii) applicable only if the recipient of sum of money or specified property is an Individual or HUF The provisions of section 56(2) (vii) inserted w.e.f. 1-10-2009 are applicable only if the recipient of sum of money or specified property is an Individual or HUF.

However section 56(2)(viia) has been introduced to cover partnership firms and certain companies if they receive specified shares.

2.2 Provisions not applicable in case the specified properties are received from a relative or in other prescribed circumstances The provisions of section 56(2)(vii) inserted w.e.f. 1-10-2009 are applicable in case the specified properties are received from a relative or in other prescribed circumstances. In the following circumstances the prescribed amounts or the value of the property received are not chargeable to tax u/s 56(2)(vii) of the Act

(i) Any receipt of sum of money or any property from any relative;

(ii) Receipt on occasion of the marriage;

(iii) Receipt under a Will;

(iv) Receipt by way of inheritance;

(v) Receipt in contemplation of death;

(vi) Receipt from a local authority as defined in the Explanation to section 10(20;

(vii) Receipt from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in section 10(23C);

(viii) Receipt from any trust or institution registered u/s 12AA.

2.3 Meaning of relative


The provisions of section 56(2)(vii) inserted w.e.f. 1-10-2009 are not applicable in case the specified properties are received from a relative or in other prescribed circumstances.

The term "relative" as defined includes spouse, brother, sister, brother or sister of spouse, brother or sister of either of the parents, any lineal ascendant or descendant of the individual or of the spouse and spouse of any of the persons mentioned above. Following is the list of some persons considered relative of an individual for the purpose of section 56(2)(vii).

2.4 Specified properties covered u/s. 56(2) (vii):

The provisions of section 56(2) (vii) are applicable w.e.f. 1.10.2009 on the receipt of a sum of money and specified properties, as mentioned hereunder.

For this purpose "property" means the following "property" capital assets –

(i) Immovable property being land or building or both;

(ii) Shares and securities;

(iii) jewellery;

(iv) archaeological collections;

(v) drawings ;

(vi) paintings;

(vii) sculptures ;

(viii) any work of art; or

(ix) bullion (w.e.f. 1-6-2010)

These are summarized below–

(a) Sum of money


Where any sum of money exceeding Rs.50,000 in aggregate in any previous year is received by an individual or HUF without any consideration the aggregate sum shall be deemed to be the income of the recipient.

(b) Immovable property transferred without consideration


Where immovable property is received by an individual or HUF without any consideration and the value of such property for stamp duty purpose exceeds Rs. 50,000, the value of the said property for the stamp duty purpose would be taxable as income from other sources.

(c) Transfer of specified properties other than immovable properties without consideration Where a property, specified for this purpose, other than immovable property, is received by an individual or HUF without any consideration and the fair value of the same exceeds Rs.50,000 then the fair market value of the property shall be deemed to be the income of the recipient.

(d) Transfer of specified properties other than immovable properties for a consideration lower than fair market value

Where a property specified for this purpose, other than immovable property is received by an individual or HUF for a consideration and such consideration is less than the fair market value of the property by an amount exceeding Rs. 50,000, the fair market value reduced by the consideration paid, would be taxable as income from other sources.

For the purpose of computing capital gains on subsequent transfer of such property by the recipient, cost of acquisition u/s.49 shall be increased by the amount of value taxed as above under the head `income from other sources'.

3. Threshold limit: (Rs. 50,000)


The threshold limit of Rs. 50,000/- would apply separately for each kind of receipt in the form of cash, immovable property and other property.

4. Stamp Duty Value to be adopted in case of Immovable Property


Stamp duty value as is assessed or assessable by any authority or Central Government or State Government for the purpose of stamp duty is to be adopted. It is doubtful whether basis of valuation for the purpose of stamp duty has been notified by all the State Governments in respect of all the properties, including agriculture land, etc. In case basis for valuation has not been notified for the purpose of stamp duty, the value taken would only be value as is mentioned in the documents registered or the value as would have been adopted by concerned authorities for the purpose of stamp duty. In the cases where documents have not been executed or registered, there are likely to be dispute in determination of assessable value in view of positive or negative aspects of a property.

In respect of immovable properties the A.O. has also been authorized to make reference to Valuation Officer.

5. Fair Market Value/Valuation of Jewellery


As per Rule 11UA(a), The Valuation of Jewellery will be made as per Rule 11(UA)(a) of I.T. Rules 1962.

6. Determining FMV for Archaeological collections, drawings, paintings etc:


Rule 11UA(b) governs the valuation of the above items.

7. Taxable event is Receipt


The Taxable event is receipt of money or immovable property or property other than Immovable property. As regards sum of money, shares, drawings, paintings etc., are concerned, they can be taken as received when they are physically handed over and as regards shares when they are transferred in the name of the recipient.

In the case of immovable property received without consideration, it appears that the receipt would be treated as complete ownership vests on the date of execution of the deed though registered later. Thus ownership relates back to the date of execution of the deed though registered at a later date. The concept of possession of the property coupled with registration or as envisaged in sections 2(47) (v) and (vi) and section 27of the Act can also be enforced to determine the date of receipt.

8. Corresponding provisions in Direct Tax Code (`DTC')


Under DTC section 56(2) which with taxation residuary income includes any income in the nature of gifts under sections 56(2)(h) and (i) of DTC which reads as under:

"(h) the aggregate of any money's and the value of any specified property received, without consideration by an individual or a HUF;

(i) the amount of voluntary contribution received by a person, other than an individual or HUf, from any other person;"

Section 56(3) provides the exceptions for the amount received under 56(2)(h) and is pari materia with section 56(2)(vii) of the Act except that the meaning of the word relative will not include any lineal descendant of a brother or sister of the either the individual or of the spouse of the individual. Likewise the definition of "specified property" under section 56(4) of the DTC is the same as in section 56(2)(vii) except that it does not include Bullion.

Section 56(4)(d) of DTC states that:

"the value of any property by referred to in clause (h) of sub-section(2) shall be:-

(i) the stamp duty value in the case of an immovable property as reduced by the amount of consideration, if any, paid by the assessee; and

(ii) the fair market value in the case of any property as reduced by the amount of consideration, if any, paid by the assessee.

9. Issues for Consideration

• Whether the provisions of sub-clause (viia) of Section 56(2) of the Act would apply to convertible debentures?

• Whether Family Settlements wherein the shares are allotted inter-se amongst family members to avoid disputes would be covered by the aforesaid provisions.

• A firm or a proprietary concern may hold the shares of a closely held company. On conversion into a company all the Assets of Firm/Proprietary concern become the assets of the company. On such conversion, if shares are received by the company at less than the specified value, would the provisions of Section 56(2) (viia) be attracted. Likewise, what would be the position of a partner contributing shares of a closely held company as his capital contribution on becoming partner of a firm?

• What would be the position of shares received through "Will" by a firm or a company?

• How would be the provisions of sub-clause (viia) of Section 56(2) of the Act apply to transfer of right of shares or receipt of bonus shares.

• Company "A" has issued Bonus shares in the ratio of 1:1. Prior to the issue of Bonus the price of each share is Rs.2000/- and Ex. Bonus the price is Rs.1100/-. In such a case the value of two shares (original and Bonus) is Rs.2200 as against cost/pre Bonus of Rs.2000/-. The actual benefit is only Rs.200/. The Assessing Officer suppose contemplates to adopt the FMV of the Bonus shares i.e. Ex. Bonus he may consider income of Rs.1100/- per Bonus Share ignoring the fact that the price of original share has diminished by Rs.900/- per share due to issue of Bonus shares. What would be the position?

10. Conclusion

I have made an attempt to highlight some of the salient features of Gifts being treated as deemed income within the meaning of Sections 56(2)(vi) (vii) & (viia) of the Act and being a complicated subject prone to vexatious litigation.

Assessing Officer can extend time for submission of audit report under sub-

IT : Assessing Officer can extend time for submission of audit report under sub-section (2C) of section 142 on request from auditor - [2011] 10 taxmann.com 192 (Ker.)

MAT : (Hyd `B'-Trib)(SB)
(2010) 36 (II) ITCL 2 (Hyd `B'-Trib)(SB)

Rain Commodities Ltd. v. Dy. CIT

Counsel: Rajan Vora, for the Appellant q Ms. Vasundhara Sinha, for the Respondent

ORDER

The assessee is in appeal before us against the order of the learned Commissioner under section 263 of the Income Tax Act, 1961 (the Act) dated 23-3-2009 for the assessment year 2004-05. On a reference made by the Division Bench to the honourable President, Income Tax Appellate Tribunal, the honourable President vide order dated 27-10-2009, constituted the present Special Bench to adjudicate the following question of law :

"Whether, in the facts and circumstances of the case, the Commissioner of Income-tax was justified in invoking the provisions of section 263 and directing the assessing officer to recompute the book profit under section 115JB of the Act, 1961, by considering the profit and loss account prepared in accordance with Parts II and III of Schedule VI to the Companies Act, 1956, on account of gains arising out of the transfer of assets to wholly owned subsidiary as part of book profit without considering the provisions of section 47(iv) of the Income Tax Act, 1961."

2. The brief facts of the case are that, the assessee-company filed return of income for the assessment year 2004-05 declaring a loss of Rs.45,81,56,760. The assessment was completed under section 143(3) of the Act determining the total loss at Rs. 36,27,98,173 after making an addition of Rs. 9,53,58,587 towards deferred revenue expenditure. As per the profit and loss account, prepared in accordance with Parts II and III of Schedule VI to the Companies Act, 1956, the profit before tax was Rs. 99,42,30,515 and no income was offered under section 115JB of the Income Tax Act. As such, on examination of records, the Commissioner of Income-tax assumed his jurisdiction under section 263 of the Act for revision on the ground that the assessee is liable to pay income-tax on book profit as declared by the assessee in its profit and loss account as follows :

Profit after taxation and extraordinary items
Rs.
99,42,30,595

Balance brought forward from previous year
Rs.
47,43,86,462

Book profit
Rs.
51,98,44,133


3. As seen from the above, the Commissioner of Income-tax observed that the results of the assessee at Rs. 99,42,30,595 which was arrived after adding the extraordinary item of Rs. 1,16,11,32,013 is to be considered for arriving at the book profit under section 115JB of the Act. The contention of learned counsel for the assessee is that the above amount of extraordinary item of Rs. 1,16,11,32,013 consists of the following items which cannot form part of the book profit.

"Extraordinary item of Rs. 1,16,11,32,013 includes the following debit/ credit items.

(Rs.)

(1)
Write off (bad debts/other advances paid which cannot be recovered)
33,47,64,019 (Dr)

(2)
Write back (creditors/advances received not considered for payment)
4,16,67,423 (Cr)

(3)
Profit on transfer of assets of Rain Commodities Ltd. (100% holding co.) to Rain Industries Ltd. (100% subsidiary company )which is exempt under section 47(iv) of the Income Tax Act.
1,49,77,46,577 (Dr)

(4)
Loss on sale of other assets
4,35,17,968 (Dr)

1,16,11,32,013


4. Further, it was also submitted by the assessee that Rain Commodities Ltd., is a 100 per cent, holding company and Rain Industries Ltd. is a 100 per cent, subsidiary company and as per the scheme of arrangement between Priyadarshini Cements Ltd. (presently known as Rain Commodities Ltd.) and Rain Industries Ltd., which was approved by the hon'ble Andhra Pradesh High Court, the assets and liabilities of M/s Priyadarshini Cements Ltd. were transferred to the Rain Industries and the capital gain arising out of this transaction is exempted under section 47(iv) of the Act from income-tax. The transfer of assets from holding company to subsidiary company is not regarded as transfer under section 47(iv) of the Act and it does not constitute a part of total income in terms of section 2(45) of the Act. It is also submitted that even though assets are transferred from 100 per cent, holding company to 100 per cent, subsidiary company, the transfer is not regarded as a transfer under section 47(iv) of the Income Tax Act. When there is no transfer under section 47(iv), there is no question of deeming the capital gain as income of the assessee. As such, the profit on transfer of assets of Rain Commodities Ltd., to Rain Industries Ltd. at Rs. 1,49,77,46,377 cannot be treated as business income as it is not regarded as transfer of assets under section 47(iv) of the Act since profit arising out of this transfer cannot be treated as income in terms of section 2(24) of the Act. According to the assessee, book profit is negative as shown below :

Profit as per profit and loss account as on 31.3.2004
Rs. 99,42,30,595

Less : Capital gains exempt under section 47(iv) which cannot be Deemed as income on transfer of assets from 100 per cent, holding company to 100 per cent, subsidiary company as the transfer cannot be considered as a transfer under section 47 of the Income Tax Act, 1961
Rs. 1,49,77,46,577

Book profit (negative) (-)
Rs. 50,35,15,982


5. According to the assessee's counsel, no adjustment against book losses/ depreciation of earlier years (Rs. 47,43,86,462) is required and hence, there is no book profit. Not convinced with the explanations and submissions made by the assessee, the Commissioner of Income-tax assumed his jurisdiction under section 263 of the Act and held that assessment order passed by the assessing officer is erroneous and prejudicial to the interests of the revenue and directed the assessing officer to adopt the book profits of the assessee at Rs. 99,42,30,595 shown in the profit and loss account under section 115JB of the Act with a further direction to allow eligible loss brought forward or unabsorbed depreciation whichever is less as per books of account. Aggrieved by the order of the Commissioner, the assessee is in appeal before us. At the time of hearing, none of the parties before us advanced any serious objection about the validity of the assumption of jurisdiction by the learned Commissioner under section 263 of the Act. Accordingly, we confine ourselves to adjudicate the question referred to us on the merits.

6. Learned counsel for the assessee submitted that the intention of section 115JB under the Act is to tax only the "profits" of the company and not to tax the profits other than the normal business profits generated while carrying on the business activities. The assessee's counsel placed reliance on the decision of the Calcutta Special Bench of the Income Tax Appellate Tribunal in the case of Sutlej Cotton Mills Ltd. v. Asst. CIT (1993) 199 ITR (AT) 164 wherein the intent of the Legislature from the inception of section 80VVA till the amendments made in this regard to date to section 115J are considered. The purposive construction of section 115J is considered. The purposive construction of section 115J was observed and concluded that the book profits are only those which are assessable as income under the Act. In the interpretation of statutes, one has to adopt a construction as well promote the general legislative purpose underlying the provision. After examining the memorandum to the Finance Minister Speech explaining the provision, it was concluded that the expression "book profit" was intended to be confined to business profit and was not intended to include profit on realisation of any asset. The genesis of section 115J, thereafter section 115JA and now section 115JB was to ensure that the assessee, while making profit from operations, should not enjoy tax free status due to various deductions available. Therefore, there was never any intention of the Legislature to tax what is not profit from operations under section 115JA (115JB now) of the Act.

7. It is submitted that, section 115JB(2) specifically provides that every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. Therefore, the profit realised from sale of assets did not form part of the book profit as required to be shown in the profit and loss account as an extraordinary item under the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. The hon'ble Delhi Income Tax Appellate Tribunal in the case of Asst. CIT v. Northern India Theatres P. Ltd. reported in (1996) 218 ITR (AT) 50 (Del) (TM) has dealt with the question whether profit on sale of fixed assets should be shown as profit for the purpose of Parts II and III of Schedule VI, and has held that capital gain on sale of fixed assets do not partake the character of business profits and the same should not be shown as business profits in a properly prepared profit and loss account as per the provisions of Parts II and III of Schedule VI to the Companies Act. The hon'ble Income Tax Appellate Tribunal has further held that if items of credit which do not relate to the business carried on by the company are found included in its profit and loss account, such a profit and loss account cannot be called as profit and loss account prepared in accordance with the requirements of Parts II and III of Schedule VI. Hence, it is submitted that the profits derived on transfer of assets is profit realised on capital assets in its hands, and thus could not be a part of the profit and loss account in accordance with the provisions of Parts II and III of Schedule VT to the Companies Act, 1956.

8. It is also submitted that only the profits in the nature of income commercially understood can be liable to tax under section 115JB and not capital receipt which may be admittedly of commercial in nature like gift, amalgamation reserve, capital reserve and revaluation reserve irrespective of the treatment in the books of account. Therefore, merely on account of accounting treatment given to the particular receipt, the nature of receipt cannot be decided. Part II of Schedule VI to the Companies Act deals with the requirement of profit and loss account whereas Part III deals with interpretation.

9. The profit arising on sale of investment cannot be treated as revenue receipt arising from the carrying on of the business of the assessee-com-pany. The intention of the Legislature is to tax commercial profits under section 115JB and not the profit arising on sale of assets. The introduction of section 115JB is to tax the dividend paying company but not paying any tax.

10. According to the standard accounting practices as well as under the Income Tax Act the assessee has two options to choose manner in which the said surplus amount is to be accounted. Either the same may be credited to the profit and loss account or transferred to the general reserve accounts. As per the definition of income under section 2(24) of the Act, income includes any capital gains chargeable under section 45 of the Act. Capital gains which are not chargeable under section 45 shall not be treated as income under section 2(24) of the Income Tax Act and consequently as the charging section, i.e., section 4 of the Income Tax Act fails and such gain shall not be chargeable to tax under any other provisions of Income Tax Act. In this regard, he relied on the decision of the Supreme Court in the case of CIT v. D. P. Sandhu Bros. Chembur P. Ltd. reported in (2005) 273 ITR 1. He submitted that the receipts which are not taxable under the normal provisions of this Act cannot be treated as part of book profit under section 115JB. It is also submitted that the provisions of section 115J and the provisions of sections 115JA and 115JB are totally different. Section 115JB(5) 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 decision of the Bombay High Court in the case of CIT v. Veekaylal Investment Co. Pvt. Ltd. (2001) 249 ITR 597 is totally distinguishable as in that case the ruling was given under section 115J whereas the section under question before the Special Bench is under section 115JB of the Act which is very much different from section 115J. In that case, the court has not considered section 2(24) which defines the income and section 4 of the Act which is a charging section under the Income Tax Act. In view of the above, learned counsel for the assessee concluded that the only income as commercially understood can be liable to tax under section 115JB and not every credit to the profit and loss account. The Explanation to section 115JB which also refers to the exclusion of income which is not chargeable to tax under section 10 for calculating book profit. Thus, on the same line what is chargeable to tax is only to be part of the book profit. Hence, the decision of CIT v. Veekaylal Investment Co. Pvt. Ltd. (2001) 249 ITR 597, etc., relied on by the department are not applicable to the facts of the instant case. It is therefore submitted that the order of the Commissioner of Income-tax under section 263 of the Act directing to treat the surplus arising from transfer of business as book profit is not correct and the same needs to be reversed. Otherwise, virtually it will mean taxing capital receipt as income which is not the intention of section 115JB of the Act.

11. For this purpose, learned counsel for the assessee relied on the following judgments :

(1) Cadell Weaving Mill Co. P. Ltd. v. CIT (2001) 249 ITR 265 (Bom) approved by the Supreme Court in CIT v. D. P. Sandhu Bros. Chembur P. Ltd. (2005) 273 ITR 1. Income under section 2(24) (vi) shall include only capital gains chargeable to tax under section 45 and not all capital gains, i.e., capital gains not chargeable to tax under section 45 falls outside the definition of income under section 2(24).

(2) Asst. CIT v. Mukund Ltd. (I.T.A. No. 304/Mum/2004). Capital gains on sale to 100 per cent, subsidiary not chargeable to tax under section 47(iv) of the Act cannot be subjected to tax under the minimum alternate tax provisions.

(3) ITO v. Su-raj Jewellery India Ltd. (2008) 22 (II) ITCL 288 (Mum-Trib) : (2008) 21 SOT 79 (Mum). Capital gains on sale to holding company not chargeable to tax under section 47(iv) of the Act cannot be subjected to tax under minimum alternate tax provisions.

(4) ITO v. Frigsales (I) Ltd. (2005) 4 SOT 376 (Mum). Capital gains not chargeable to tax under section 50 of the Act cannot be subjected to tax under the minimum alternate tax provisions.

(5) Oriental Containers Ltd. v. Joint CIT (2008) 20 (II) ITCL 177 (Mum-Trib) : (2007) 19 SOT 30 (Mum). Surplus on revaluation of deferred sales tax liability is not of income nature and accordingly, such item could not form part of book profit for minimum alternate tax provisions.

(6) Pal Synthetics Ltd. v. Joint CIT (I.T.A. No. 1310/Mum/03). Subsidiary receipt which is not a taxable income cannot be subject to book profit for minimum alternate tax provisions.

(7) Sutlej Cotton Mills Ltd. v. Asst. CIT (1993) 199 ITR (AT) 164. Book profit was intended to be confined to business profits and was not intended to include profit on realization of any asset. The capital gains is deemed to be income only for the purpose of section 45 and cannot be deemed to be income for minimum alternate tax provisions.

(8) Asst. CIT v. Northern India Theatres P. Ltd. reported in (1996) 218 ITR (AT) 50 (Del) (TM). Profits on sale of fixed assets yield only capital gains and they do not partake the character of business profits. Simply because these were shown as part of trading receipts in the profit and loss account and accounts were audited, nature of receipt cannot change.

(9) Oswal Agro Mills Ltd. v. Deputy CIT (1994) 51 ITD 447 (Delhi). Book profits should include only income from the business activities of the company and not any income which arose on account of capital gains. Accordingly, short-term capital gains as a result of sale of certain Government securities credited to the profit and loss account not to be included for computation of book profit under minimum alternate tax provisions.

(10) GKW Ltd. v. Joint CIT (2000) 74 ITD 161 (Cal). The object of the Legislature is to consider the profits of the business while computing the book profits of the company and profit on transfer of assets should not be considered while computing the same.

(11) Hitkari Fibres Ltd. v. Joint CIT (2004) 90 ITD 654 (Mum). Waiver of interest written back in the profit and loss account, provision of which was not allowed in earlier years, not to be included in the minimum alternate tax provisions. The minimum alternate tax to be levied on real book profits which has been earned by the companies and not on artificial income.

12. It is further submitted that capital gains in this case are exempt under section 47(iv) of the Act and this fact was not disputed by the department. Therefore the capital gains are not in the nature of income and they cannot be taxed as income under the provisions of section 115JB of the Act. He submitted that section 115JB is a self-contained code and sub-section (5) into the statute which was not in section 115J, states that "save otherwise provided in this section, all other provisions of the Act shall apply to every assessee being a company". Hence he submitted that now the other provisions of the Act will continue to apply in view of sub-section (5) of section 115JB of the Act. Therefore, the exempt income under section 47(iv) of the Act would remain exempted as per the provisions of sub-section (5) and the operation of non obstante clause is limited only to determine the book profit and the book profit so determined has to be taxed taking into consideration the other provisions of the Act.

13. The learned Departmental Representative Smt. Vasundra Sinha, submitted that the very term used to describe the scheme of taxation under section 115JB of the Act is "minimum alternate tax", i.e., to be seen as an alternate method of taxation. The provision was to be invoked only when the tax payable by the company fell below a certain limit. In such circumstances, the regular provisions ceased to operate and a new and alternate basis of taxation was provided for. The intention of the section is to tax the book profit, irrespective of its nature or component and without the privileges of deductions and exemptions available under the regular provisions. In this alternate method, what is subjected to tax is the book profit and not "income". So, the nature of receipt being subjected to tax may not be "income" in the strict accounting or legal sense but is still taxable so long as it is a part of "book profit". It is further submitted that sub-section (1) of section 115JB begins with a non obstante clause, "Notwithstanding anything contained in any other provisions of this Act. . .". This is also the charging sub-section while sub-section (2) provides for the computation of income under this section. Together, they provide for levy of income-tax on "book profit" and not on "total income" as defined in the rest of the Act. Therefore, in determining book profits and thereby, deemed total income, they prevail over the other regular provisions of this Act. Sub-sections (1) and (2) together make section 115JB a self-contained code and there is no difference in this respect from the earlier provisions of section 115JA and section 115J.

14. She relied on the decision of the Apex Court, in the case of Apollo Tyres Ltd. v. CIT reported in (2002) 255 ITR 273, for the proposition that the assessing officer cannot go beyond the profit and loss account except to the extent provided in Explanation 1. Even though the decision was rendered in the context of section 115J of the Act but there is no doubt that section 115J did not have any provision analogous to sub-section (5) of section 115JB of the Act. However, section 115JB (5) of the Act does not have an impact on the charging and computation aspects of section 115JB, contained in its sub-sections (1) and (2). This is clear from the decision of the Supreme Court in the case of CIT v. HCL Comnet Systems and Services Ltd. (2008) 23 (I) ITCL 501 (SC) : (2008) 305 ITR 409 (SC), rendered in the context of section 115JA (whose sub-section (4) is analogous to sub-section (5) of section 115JB), where the views expressed in the case of Apollo Tyres Ltd. (2002) 255 ITR 273 were extensively quoted, relied on and reiterated. From the above Apex Court decisions, the court laid down the following principles with regard to section 115JB of the Act :

(i) The assessing officer has to accept the authenticity of the accounts maintained by the company in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, which are certified by the auditors and laid before the company at the annual general meeting.

(ii) The assessing officer cannot go beyond the net profit shown in the profit and loss account prepared in accordance with Parts II and III of Schedule VI to the Companies Act, except for the adjustments permissible under the Explanation.

(iii) The adjustments required to be made to the net profit as per section 349 of the Companies Act are quite different from the adjustments required to be made as per the Explanation.

15. It is further submitted that the capital gain in question has been duly reflected in the profit and loss account as "extraordinary items". Further, Note 1 of the "Notes on accounts" categorically states that "the financial statements have been prepared on the basis of going concern, under the historical cost convention on accrual basis, to comply in all material aspects with applicable accounting principles in India, the Accounting Standards issued by the Institute of Chartered Accountants of India and the relevant provisions of the Companies Act, 1956". There is no mention in any of the other "Notes on accounts" that the inclusion of the capital gain in question was not in keeping with Parts II and III of the Schedule VI to the Companies Act or of the accounting principles. Thus, it cannot be said on the basis of the audited accounts of the assessee that the capital gain was not includible in the profit and loss account prepared in accordance with Parts II and III of Schedule VI to the Companies Act. Since the capital gain is part of net profit as per the profit and loss account prepared in accordance with Schedule VI to the Companies Act, it cannot be excluded from net profit for computing book profit unless specifically provided in the Explanation to section 115JB. There being no reference to section 47(iv) in the Explanation, the assessee is not entitled to any such deduction from net profit. "Book profit" as defined in the Explanation, is derived from the profit and loss account prepared in accordance with Parts II and III of Schedule VI to the Companies Act. It is to be noted that, as per Explanation, the basis for computing the book profit is the "profit and loss account", so prepared, and not the "net profit" as per the provisions of the Companies Act. Reference to the Companies Act is to be made only with regard to the profit and loss account and not for the definitions or determination of net profit. "Book profit" is to be determined exclusively in accordance with Parts II and III of Schedule VI to the Companies Act. Though there are references in various sections of the Companies Act to the drawing up of the profit and loss account or the determination of net profits, for the purposes of the determination of "book profits" under section 115JB, it is the manner and method provided in Parts II and III of Schedule VI to the Companies Act, alone that is relevant. The provisions of section 349 of the Companies Act, which specifies the manner in which "net profits" of the company are to be determined cannot, therefore, be imported into section 115JB of the Act when it has not expressly been provided for. Paragraph 2(b) of Part II of Schedule VI to the Companies Act requires that "the profit and loss account shall disclose every material feature, including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of an exceptional nature". Such transactions are also specifically required to be disclosed in the profit and loss account by paragraph 3(xii) of Part III of Schedule VI. It is, thus, clear that all such receipts are very much required to be reflected in the profit and loss account and included in the net profit. While section 115J (as also section 115JA) referred only to the Companies Act for the manner of preparation of the profit and loss account, section 115JB lays down stricter norms by specifying adherence to accounting standards and accounting policies as well. Paragraph 34 of Accounting Standard 13 provides that "On disposal of an investment, the difference between the carrying amount and net disposal proceeds should be charged or credited to the profit and loss statement". Thus, even as per the Accounting Standards, capital gains are required to be included in the profit and loss account and consequently in the net profit.

16. She also placed reliance on the decision of the Bombay High Court in the case of CIT v. Veekaylal Investment Co. P. Ltd. (2001) 249 ITR 597, where the requirements of the Companies Act for reflection of capital gain in the profit and loss account were examined and hence, the inclusion of capital gains in its profit and loss account by the assessee is, therefore, in accordance with the provisions of Schedule VI to the Companies Act and Accounting Standards.

17. The view that exempt income is not to be included in the "book profits" in view of the provisions of section 115JB(5), is not in consonance with the decision of the Supreme Court in HCL Comnet Systems and Services Ltd. (2008) 23 (I) ITCL 501 (SC) : (2008) 305 ITR 409 (SC) where the matter had been considered with reference to section 115JA, which is analogous to section 115JB. Section 115JB does not classify "book profits" into heads of income, leave alone "taxable" and "exempt" income. The provisions of the Income Tax Act relevant for the computation of regular income are not relevant for the purpose of computation of "book profits". Indeed, if the argument that exempt income is to be excluded from "book profits", is to be taken to its logical end, then all the provisions of the Income Tax Act ought to be applied to net profit to arrive at the "book profit". Such an interpretation would render the non obstante clause of section 115JB(1) ineffective and the section 115JB(2) superfluous. For instance, Explanation 1 to section 115JB(2) provides for reduction of deductions under sections 80HHC, 80HHE and 80HHF from the book profits. If the assessee's argument were to be accepted, the other deductions of Chapter VI should also be reduced from the book profit since their non-application is not "otherwise provided". Such an interpretation of section 115JB(5) cannot be said to be the intention of the Legislature. Certain incomes have been exempted from taxation under the Income Tax Act by various specific provisions. Section 47 is one such provision whereby certain transactions have been specifically exempted from the application of section 45 of the Act. Such an exemption does not change the nature of the transaction from intrinsically being in the nature of transfer or resulting in income. Indeed, section 47 further emphasises that such transactions would have been in the nature of transfer and the resultant receipt would have been in the nature of income, but for the specific exemption provided by the section. No such exemption being available to the assessee under section 115JB, the question of claiming deduction of all "exempted income" does not arise.

18. The learned Departmental representative placed reliance on the following decisions :

(i) N. J. Jose and Co. P. Ltd. v. Asst. CIT (2008) 22 (I) ITCL 525 (Ker-HC) : (2010) 321 ITR 132 (Ker).

(ii) Growth Avenue Securities P. Ltd. v. Deputy CIT (I.T.A.No. 3912/Del/2005 dated 29-5-2009) reported at (2010) 32 (II) ITCL 81 (Del `B'-Trib) : (2010) 1 ITR (Trib) 807 (Delhi).

19. In the case of N. J. Jose and Co. P. Ltd. v. Asst. CIT (2008) 22 (I) ITCL 525 (Ker-HC) : (2010) 321 ITR 132, the Kerala High Court held that there was no provision for exclusion of such income included in the profit and loss account and the fact that income was exempt under section 54E was not relevant for tax on book profits under section 115J of the Act. In the case of Growth Avenue Securities P. Ltd. v. Deputy CIT (2010) 32 (II) ITCL 81 (Del `B'-Trib) : (2010) 1 ITR (Trib) 807 (Delhi) the Income-tax Appellate Tribunal has, while holding that capital gain exempt under section 54EC were to be included in the book profits, also examined the decisions in Sutlej Cotton Mills Ltd. v. Asst. CIT reported in (1993) 199 ITR (AT) 164 ; 45 ITD 22 and ITO v. Frigsales (India) Ltd. reported in (2005) 4 SOT 376 (Mum) and held them to be not in consonance with the decisions in Apollo Tyres Ltd. (2002) 255 ITR 273 and HCL Comnet Systems and Services Ltd. (2008) 23 (I) ITCL 501 (SC) : (2008) 305 ITR 409 (SC).

20. Declaration of dividend is not a pre-requisite for application of section 115JB of the Act. The purpose of the section, as of its predecessors, sections 115J and 115JA, was to tax companies which were making profits and also declaring dividend. However the reference to declaration of dividend, whether in the Speech of the Finance Minister or in circulars of the Central Board of Direct Taxes, was merely by way of explaining the kind of malaise that the section sought to address. There is no reference in the section itself that dividend being declared by the company as a condition for invoking the section. The only condition prescribed for invoking the section is that the income-tax payable by the company is less than a prescribed percentage of the book profit. The law is clear, categorical and unambiguous on this issue. It has been held by the Supreme Court in CIT v. Tara Agencies (2007) 17 (I) ITCL 15 (SC) : (2007) 292 ITR 444 (SC) that the intention of the Legislature has to be gathered from the language used in the statute, which means that attention should be paid to what has been said as also to what has not been said. The court also held that it is the bounden duty and obligation of the court to interpret the statute as it is. It is contrary to all rules of construction to read words into a statute which the Legislature in its wisdom has deliberately not incorporated. The plea of the assessee that section 115JB is not applicable to its case due to absence of dividend is, therefore, devoid of merit. Hence, the order of the Commissioner be upheld and the appeal of the assessee be dismissed. She also relied on the decision in the case of CIT v. Veekaylal Investment Co. P. Ltd. (2001) 249 ITR 597 (SC), wherein it was held as follows (headnote) :

"Held, allowing the appeal, that according to section 115J of the Act, in the case of an assessee being a company, if the total income is less than 30 per cent, of its book profits then the total income of such company shall be deemed to be an amount equal to 30 per cent, of such book profit and such income shall be chargeable to tax. The important thing to be noted is that while calculating the total income under the Income Tax Act, the assessee is required to take into account income by way of capital gains under section 45 of the Act. In the circumstances, while computing the book profits under the Companies Act, the assessee has to include capital gains for computing the book profits under section 115J. Even under clause 3(xii)(b) of Part II of Schedule VI to the Companies Act, 1956, profits or losses in respect of transactions or transactions of an exceptional or non-recurring nature are to be disclosed. This shows clearly that capital gains should be included for the purposes of computing book profits."

21. And the decision of the hon'ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT (2002) 255 ITR 273 (SC), wherein it was held as follows (head-note) :

"The assessing officer, while computing the book profits of a company under section 115J of the Income Tax Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The assessing officer, thereafter, has the limited power of making increases and reductions as provided for in the Explanation to section 115J. The assessing officer does not have the jurisdiction to go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation. The use of words `in accordance with the provisions of Part II and III of Schedule VI to the Companies Act' in section 115J was made for the limited purpose of empowering the assessing officer to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the assessing officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinised and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-section (1A) of section 115J does not empower the assessing officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company.

Held accordingly, that, while determining the `book profits' under section 115J, the assessing officer could not recompute the profits in the profit and loss account by excluding provisions made for arrears of depreciation.

Decision of the Kerala High Court in CIT v. Appollo Tyres Ltd. (1999) 237 ITR 706 reversed on this point."

22. It was held by the hon'ble Supreme Court in the case of Apollo Tyres Ltd. (2002) 255 ITR 273, where the accounts are prepared and certified by the auditors, which in turn are approved/adopted by the shareholders of the company and are filed before the Registrar of Companies, the assessing officer has no power of disturbing the profits of business. The only power of the assessing officer under section 115JB of the Act is to make suitable adjustments to the profits of the business under the Explanation to this section. The net profit shown in the profit and loss account are to be adopted for working out the book profit of the company under section 115JB of the Act by the assessing officer except to the extent adjustments provided in the Explanation to the said section.

23. We have considered the rival submissions and perused the materials available on record and the case law relied upon by both the parties. We have taken into consideration the ratio decidendi of all the decisions relied upon by the rival parties. The omission of reference to some of the cases in the order is either due to their irrelevance or to relieve the order from the repetitive nature of the decisions. Under the minimum alternate tax (MAT) provisions, the assessing officer is concerned with the adjustments to be made with the net profit as shown in the profit and loss account. One of the moot questions relevant to the issue before us is whether the assessing officer has power to alter the net profit ? In our considered opinion, "Yes". We agree that it is settled law that the assessing officer has the power to alter the net profit. In the following two cases, the assessing officer can rewrite the profit and loss account, i.e., to say that the assessing officer should recalculate the net profit and then follow the adjustments of the minimum alternate tax as usual : (1) If it is discovered that the profit and loss account is not drawn up in accordance with Part II and Part III of Schedule VI to the Companies Act. However, the assessing officer cannot disturb the net profit as shown by the assessee where there are no such allegations, fraud or misrepresentation but only a difference of opinion as to whether a particular amount should be properly shown in the profit and loss account or in the balance-sheet. (2) If accounting policies, accounting standards are not adopted for preparing such accounts and method, rates of depreciation which have been incorrectly adopted for preparation of the profit and loss account laid before the annual general meeting. Except for the above two cases, the assessing officer has no power to alter the net profit shown by the companies for the purpose of computing the book profit. Thus it is clear that under the minimum alternate tax, the assessing officer should take the net profit as computed by the assessee and then make the adjustments under section 115JB of the Act. It is common that some companies follow an accounting year under the Companies Act, 1956, which is different from the financial year under Income Tax Act, 1961.

These companies generally prepare two sets of accounts—one for the Companies Act and another for the Income Tax Act. The reason being different accounting policies, standards, depreciation methods and rates are adopted in two sets of accounts so that higher profit is reported to shareholders and lower profit for the Income-tax authorities. To curb the above practice only this recalculation of net profit under minimum alternate tax was incorporated so that there should be a consistency in accounting policies, standards, methods and rates of depreciation within the knowledge of the income-tax authorities.

24. Section 115JB reads as follows :—(1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2007, is less than ten percent, of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of ten per cent. . . .

(2) Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956) : . . .

Explanation 1, for the purposes of this section, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by . . .

25. It is evident from the above that, the moot question that needs to be decided is whether Parts II and III of Schedule VI to the Companies Act permits the exclusion of the capital gain from the profit and loss account or not ? In other words, can a profit and loss account drawn up without considering the capital gain said to be in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act or not ?".

26. Part II of Schedule VI to the Companies Act read as under :

Part II: Requirements as to profit and loss account

1. The provisions of this part shall apply to the income and expenditure account referred to in sub-section (2) of section 210 of the Companies Act, in like manner as they apply to a profit and loss account, but subject to the modification of reference as specified in that sub-section.

The profit and loss account :

(a) shall be so made out as clearly to disclose the result of the working of the company during the period covered by the account ; and

(b) shall disclose every material feature, including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of an exceptional nature.

3. The profit and loss account shall set out the various items relating to the income and expenditure of the company arranged under the most convenient heads ; and in particular, shall disclose the following information in respect of the period covered by the account : . . .

(xi) (a) The amount of income from investments, distinguishing between trade investments and other investments.

(b) Other income by way of interest, specifying the nature of the income.

(c) The amount of income-tax deducted if the gross income is stated under sub-paragraphs (a) and (b) above.

(xii) (a) Profits or losses on investments showing distinctly the extent of the profits or losses earned or incurred on account of membership of a partnership firm to the extent not adjusted from any previous provision or reserve.

Note : Information in respect of this item should also be given in the balance-sheet under the relevant provision or reserve account.

(b) Profits or losses in respect of transactions of a kind, not usually undertaken by the company or undertaken in circumstances of an exceptional or non-recurring nature, if material in amount.

As is evident from the above, the profit and loss account of a company has to disclose every material feature including credits or receipts and debits or expenses in respect of non-recurring transaction or transactions of an exceptional nature. Further the company is also required to set out the various items relating to the income and expenditure of the company arranged under most convenient heads and disclosing profit or loss in respect of transaction of a kind not usually undertaken by the company or undertaking in circumstances of exceptional or non-recurring nature if material in amount.

27. The issue whether capital gains had to be included in book profits arose before the Bombay High Court in the case of Veekay Lal Investment Co. P. Ltd. (2001) 249 ITR 597 (Bom. In that case, the court held that if for computing the total income under the normal provisions, the capital gains computed under section 45 of the Act has to be taken into account, it was not understood how in computing the book profits under section 115J of the Act, the assessee could exclude capital gain. The assessee is required to take into account income by way of capital gains under section 45 of the Act. In the circumstances, while computing the book profits under the Companies Act, the assessee has to include capital gains for computing the book profits under section 115J. Even under clause 3(xii) of Part II of Schedule VI to the Companies act, 1956, profits or losses in respect of transactions or transactions of an exceptional or non-recurring nature are to be disclosed. This shows clearly that capital gains should be included for the purposes of computing book profits. In the case of Apollo Tyres Ltd. (2002) 255 ITR 273 the Apex Court held that the words "in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act" were made for the purpose of empowering the assessing authority to rely upon the authentic statements of accounts of the company. It was held that while doing so, looking into the accounts of the company, the assessing officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act who obligates the company to maintain its accounts in a manner provided by the Companies Act and the same to be scrutinised and certified by the statutory auditors and will have to be approved by the company in its general meeting and thereafter to be filed before the Registrar of Companies which has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. It was held that if these procedures were complied with, it was not open to the assessing officer to rescrutinise this account and satisfy himself that these accounts have been maintained in accordance with the provisions of the Companies Act. The same view was reiterated in the case of Malayala Manorama Co. Ltd. v. CIT (2008) 22 (I) ITCL 15 (SC) : (2008) 300 ITR 251 (SC) by the Apex Court.

28. This principle was also applied by the Mumbai Bench of the Tribunal in the case of Deputy CIT v. Bombay Diamond Co. ITA No 7488/Mum/2007, dt 30-11-2009 [reported as (2010) 32 (II) ITCL 456 (Mum `B'-Trib)]. In that case, the assessee earned a capital profit of Rs. 10.38 crores on sale of rights to immovable property which was directly credited to the capital reserves in the balance-sheet instead of being routed through the profit and loss account. The accounts of the assessee-company were duly certified by the auditors and were also adopted in the annual general meeting. The audited accounts were filed with the Registrar of Companies. In the computation of book profits under section 115JB of the Act, the said capital profits were not included. The assessing officer took the view that by not crediting the capital profit to the profit and loss account, the assessee had contravened sub-clause (xi) (a) of clause 3 of Part II of the Schedule VI to the Companies Act and that he was, therefore, entitled to add the capital profit to the book profit. On appeal, the first appellate authority reversed the assessment order on the ground that the assessing officer had no jurisdiction to go beyond the net profit shown in the profit and loss account except to the extent provided in the Explanation 1 to section 115JB of the Act. On appeal by the department, the Tribunal upheld the stand of the assessing officer on the ground that as the assessee had not routed the capital profits through the profit and loss account and directly credited it to the balance-sheet, its accounts were not prepared in the manner provided in Part II and Part III of Schedule VI to the Companies Act. It was held that the fact that the auditors had certified the accounts was not relevant. The Tribunal distinguished the decision in the case of Apollo Tyres Ltd. v. CIT (2002) 255 ITR 273 on the ground that as the assessee had by-passed the provisions of Schedule VI and directly credited the capital profit to the reserve account, decision in the case of Apollo Tyres Ltd. (2002) 255 ITR 273 did not apply. In the case under consideration, the department is on a better footing, as the assessee-company itself credited the capital gain to the profit and loss account. Moreover, there is no qualification by the auditors that the accounts of the company are not in accordance with accounting policies, standards to be followed as per ICAI guidelines.

29. It is an undisputed fact that the long-term capital gain earned by the assessee is included in the net profit determined as per the profit and loss account prepared as per Parts II and III of Schedule VI to the Companies Act. In other words, it is not the case of the assessee that the capital gains earned by the assessee was not included in the net profit determined as per profit and loss account of the assessee prepared under the Companies Act. As per the audited accounts of the assessee, the statutory auditors have reported that amongst others, that in their opinion, the profit and loss account and the balance-sheet are in compliance with the accounting standards referred to in sub-section (3C) of section 211 of the Companies Act, and further reported that the balance-sheet and profit and loss account read together with the notes thereon, give the information required by the Companies Act, 1956, in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted. As per the audited profit and loss account, the assessee has included long-term capital gain. In the notes on accounts, it is nowhere mentioned and claimed that though the long-term capital gain is included in the profit and loss account it is not includible in the net profit in terms of the provisions of Parts II and III of Schedule VI to the Companies Act or the accounting principles accepted under the Companies Act. Hence, it is not case of the assessee that the long-term capital gains was not includible in the profit and loss account prepared in terms of Schedule VI to the Companies Act. Only in the computation of book profit under section 115JB of the Act, the assessee claimed exclusion of long-term capital gain which is exempt under section 47(iv) of the Act. It is due to the fact that the assessee claimed deduction of long term-capital gain from book profit by virtue of being exempted income in the normal provisions of the Act and not because of the reason that the same was not includible in the profit and loss account prepared under Parts II and III of Schedule VI to the Companies Act. In the circumstances, when the assessee itself has included the capital gains arising from sale of shares to subsidiary in the profit and loss account, the same cannot be excluded under any of the Explanations under section 115JB. At this point it is not necessary for us to dwell upon the situation, where the assessee has directly credited the profit on sale of asset to a reserve account. The proviso to section 115JB prescribes that the accounting policies, accounting standards and the method and rates of depreciation adopted for preparing the book profits under section 115JB shall be the same as adopted for the purpose of preparing such accounts including the profit and loss account and laid before the company at its annual general meeting. Therefore whatever accounting policy is adopted for the purpose of preparing the profit and loss account laid before the company should be adopted for computing the book profits under section 115JB. Capital gains on sale of shares were included in computing the profits presented before the shareholders and the same should also be included in computing book profits under section 115JB.

30. The Kerala High Court in the case of N. J. Jose and Co. P. Ltd. v. Asst. CIT (2008) 22 (I) ITCL 525 (Ker-HC) : (2010) 321 ITR 132 (Ker) has held that capital gains, even though exempt under the normal provisions of the Income Tax Act under section 54E cannot be excluded while computing book profits.

31. They have observed (page 134 of 321 ITR) :

"... We are unable to accept the contention of the assessee, because the assessment under Chapter XII-B on book profit is a self-contained code. The scheme thereunder is to adopt the profit and loss account of the assessee prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 and to treat the net profit shown therein as book profit. The permissible adjustments in the form of additions and deductions are provided under the Explanation to section 115J(1A) of the Act. No more deductions, rebates or allowances other than what is stated in the said Explanation are available for the computation of book profit. In fact, it is very clear from the non obstante clause in section 115J(1) that the assessment under section 115J overrides other provisions of the Act. In fact, the assessing officer gets jurisdiction to make assessment under section 115J of the Act only when the total income computed under the provisions of the Act is below 30 per cent, of the book profit of the assessee as contemplated under the said section. While deductions, rebates and allowances are available in the computation of income for normal assessment, additions, deductions and adjustments except to the extent covered by the Explanation to section 115J(1A) are not available in the computation of book profit. In other words, once the assessing officer finds that total income as computed under the provisions of the Act is less than 30 per cent, of the book profit, he has to give up normal assessment and the assessing officer has to opt for the assessment under section 115J which does not provide for any deduction in terms of section 54E of the Act. The assessee has no case that the long-term capital gains are not profit not includible in the profit and loss account prepared in terms of Schedule VI to the Companies Act. Since there is no provision in Chapter XII-B for deduction of capital gains in the computation of book profit, the assessee is not entitled to the deduction claimed. The Bombay High Court in the decision in CIT v. Veekaylal Investment Co. P. Ltd. (2001) 249 ITR 597 (Bom) also took the view that capital gains is part of profit which cannot be excluded in the computation of book profit. Even though learned senior counsel for the assessee contended that the case decided by the Bombay High Court did not involve the claim of exemption on capital gains under section 54E of the Act, we do not think this distinction makes any difference, because so long as long-term capital gains is part of profit included in the profit and loss account prepared under Chapter VI to the Companies Act, it cannot be excluded unless so provided under the Explanation to section 115J(1A) of the Act. 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. In other words, section 54E has no application in the computation of book profit under section 115J."

32. In the decision of the Bombay High Court in the case of CIT v. Akshay Textiles Trading and Agencies P. Ltd. (2008) 304 ITR 401 (Bom) : (2008) 167 Taxman 324 (Bom)the question referred to the High Court and the decision of the High Court, as reported are as under (page 402) :

"C. Whether, on the facts and the circumstances of the case and in law, the hon'ble Income tax Appellate Tribunal was correct in upholding the order of the Commissioner of Income tax (Appeals) in holding that the capital gains of Rs. 19,74,489 are not to be taken into account while computing the profits liable to be taxed under section 115JA of the Income Tax Act, 1961, and that the decision of the hon'ble Bombay High Court in CIT v. Veekaylal Investment Co. P. Ltd. (2001) 249 ITR 597 was not applicable ?

In so far as question No. `C, our attention is invited to the judgment of the Supreme Court in Apollo Tyres Ltd. v. CIT (2002) 255 ITR 273 (SC). The question framed therein which is similar to question No. `C has been answered in favour of the assessee and against the revenue. In the light of that the question of law as framed would not arise."

33. From the above it is difficult to conclude that the Division bench of the Bombay High Court in this case has overruled the decision of another Division Bench without even a line of discussion. The decision of the Bombay High Court in the case of Veekaylal Investment Co. P. Ltd. (2001) 249 ITR 597 holding that the book profits have to be computed in accordance with Parts II and III of Schedule VI to the Companies Act. This is in line with the decision of the Apex Court in the case of Apollo Tyres Ltd. (2002) 255 ITR 273. The Mumbai High Court in the case of CIT v. Akshay Textiles Trading and Agencies P. Ltd. (2008) 304 ITR 401 (Bom) : (2008) 167 Taxman 324 (Bom) has held that there is no question of law in view of the decision of the Apex Court in the case of Appollo Tyres Ltd. (2002) 255 ITR 273. From this we are not able to infer that the decision of the Bombay High Court in the case of Veekaylal Investment Co. P. Ltd. (2001) 249 ITR 597 is no longer good law. Therefore this case does not help the assessee.

34. The Delhi Court in the case CIT v. Sain Processing and Weaving Mills (P) Ltd. (2009) 26 (I) ITCL 173 (Del-HC) : (2010) 325 ITR 565 (Delhi) has held that company—Book profit under section 115J—Depreciation not debited to profit and loss account—It is obligatory under clause 3(iv) of Part II of Schedule VI to the Companies Act to give information with regard to depreciation which has not been provided for, along with the quantum of arrears—Once this information is disclosed in the notes to the accounts, it would clearly fall within the ambit of the Explanation to section 115J—Notes to the accounts form part of the profit and loss account by virtue of sub-section (6) of section 211 of the Companies Act and thus the depreciation which is not charged to profit and loss account but is disclosed in the notes to the accounts would come within the ambit of the expression "shown in the profit and loss account" occurring in Explanation to section 115J—Further, the net profit of a company cannot be determined till all the items of income and expenses as well as depreciation are taken into account—Depreciation, even if not debited to the profit and loss account has to be taken into account while determining "book profit" under section 115J as long as it forms part of the prescribed accounts—That apart, section 205(1), proviso (b) of the Companies Act read with clause (iv) of Explanation to section 115J permits reduction of net profit to the extent of past losses or unabsorbed depreciation, whichever is less—If unabsorbed depreciation can be reduced from the net profit to arrive at book profit, there is no reason why current year's depreciation which is not charged to the profit and loss account cannot be deducted from the net profit in determining book profit.

35. Regarding the judgment of the Special Bench of the Tribunal rendered in the case of Sutlej Cotton Mills Ltd. (1993) 199 ITR (AT) 164 we find that this judgment is not applicable in the present case because it was held by the hon'ble Bombay High Court in the case of Veekaylal Investment Co. Pvt. Ltd. (2001) 249 ITR 597 that capital gain is to be included in the book profit. In that case of Veekaylal Investment Co. Pvt. Ltd. (2001) 249 ITR 597, the Tribunal has decided this issue in favour of the assessee by following the judgment of the Special Bench of the Tribunal rendered in the case of Sutlej Cotton Mills Ltd. (1993) 199 ITR (AT) 164, but that decision of the Tribunal has been reversed by the hon'ble Bombay High Court, and hence this decision of the Special Bench of the Tribunal rendered in the case of Sutlej Cotton Mills Ltd. (1993) 199 ITR (AT) 164 is of no avail to the assessee.

36. It is to be noted that the assessee has not made any claim of deduction of long-term capital gain from the book profit, which goes to show that capital gain as such is not deductible from the net profit prepared in accordance with Parts II and III of Schedule VI to the Companies Act. Moreover, the taxability of capital gains 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 the profit and loss account in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act. Under these circumstances, as long as long-term capital gain is part of profit included in the profit and loss account prepared in accordance with the provisions contained in Parts II and III of Schedule VI to the Companies Act, it cannot be excluded from the net profit unless so provided under the Explanation to section 115JB of the Act for the purpose of computing book profit under section 115JB of the Act. 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. In other words, section 47(iv) of the Act has no application in the computation of book profit under section 115JB of the Act where as section like 80HHC, etc., finds place in the exclusion item.

37. It is the case of the assessee that since the capital gain arising from the transfer of a long-term capital asset was exempt to the assessee shall not be charged to tax as so provided in section 47(iv) of the Act, and as such the same is to reduce from the net profit determined in the profit and loss account prepared by the assessee while computing "book profit" within the meaning of section 115JB of the Act. Learned counsel for the assessee strongly contended that the provisions contained in sub-section (5) of section 115JB of the Act that since all other provisions of this Act shall also apply to every assessee, being a company, mentioned in section 115JB of the Act, the assessee is entitled to reduce the long-term capital gain exempted under section 47(iv) of the Act. For this proposition the assessee relies on the decision of the Mumbai Tribunal in the case of Frigsales (I) Ltd. (2005) 4 SOT 376. In that case, it is noted by the Tribunal in paragraph 3.2 of its order that the capital gain earned by the assessee being exempt under section 50 of the Act will not form part of the normal taxable income, and when the receipt is not in the nature of taxable income, it cannot be taxed as income under section 115JA of the Act. The Tribunal applied the provisions of sub-section (4) of section 115JA, which provides that "save as otherwise provided in this section (section 115JA), all other provisions of the Act shall apply", in taking a view that all other provisions of the Act would continue to operate and, therefore, the exempt income under section 50 would remain exempted as per the provisions of sub-section (4) of section 115JA. The Tribunal further observed that in section 115JA, a new sub-section (4) has been brought on the statute, which was not there in section 115J, and sub-section (4) has been introduced for the first time in section 115JA. The Tribunal, therefore, had taken a view that the operation of non obstante clause is now limited only to determine book profit and the book profits so determined have to be taxed taking into consideration the other provisions of the Act. In other words, the Tribunal held that section 115JA is a part of the Act now and the exemption allowed by one provision of the Act cannot be taken away by another provision of the Act, and, thus, in that case, the Tribunal held that if the exemption allowed under section 50 was taken away while taxing the book profits under section 115JA, it would make the provision of section 50 redundant. In this decision, a reference to the decision of the hon'ble Mumbai High Court in the case of Veekaylal Investment Co. P. Ltd. (2001) 249 ITR 597 was made but the same was not discussed or deliberated upon or relied upon by the Tribunal by observing that this decision was rendered as per the provisions of section 115J, which is a self-contained code, though a new sub-section (4) has been inserted for the first time in section 115JA of the Act. We have carefully gone through the aforesaid decision of the Tribunal in the case of ITO v. Frigsales. We have also perused the provisions of sections 115J, 115JA and 115JB of the Act. All these sections are deeming provisions. Section 115J has overriding effect over all other provisions of the Act. Section 115JA and 115JB have also overriding effect over all other provisions of the Act to the extent of the matter provided in these sections. Sub-section (4) was inserted in section 115JA of the Act. A provision similar to sub-section (4) of section 115JA was not there in section 115J of the Act. Sub-section (4) of section 115JA reads as "save as otherwise provided in this section, all other provisions of the Act shall apply". It is, thus, clear that all other provisions of the Act shall apply but subject to the provisions otherwise provided in section 115JA of the Act. In other words, the provisions specifically provided in section 115JA shall have overriding effect over all other provisions of the Act. The provision for computing book profit by increasing or reducing the net profit as shown in the profit and loss account prepared in accordance with the provisions of Part II and Part III of Schedule VI to the Companies Act is specifically provided in section 115J or 115JA or 115JB itself as the case may be, and consequently all other provisions of the Act providing the manner of computation of total income under the normal provisions of the Act cannot be applied while computing book profit under section 115J or 115JA or 115JB, as the case may be. We do not find any difference between section 115J or 115JA or 115JB in so far as method of computation of book profit as provided in the Explanation appended thereto is concerned. The Tribunal in the case of ITO v. Frigsales (I) Ltd. (2005) 4 SOT 376 has not applied the ratio of the decision of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. (2002) 255 ITR 273 and the hon'ble Mumbai High Court in the case of Veekaylal Investment Co. P. Ltd. (2001) 249 ITR 597 (Mum) for the reason that these decisions were rendered in the context of the provisions of section 115J of the Act, but the fact remains that the propositions laid down by the hon'ble Supreme Court in the case of Apollo Tyres Ltd. (2002) 255 ITR 273 (SC) have been reiterated and relied upon by the Hon'ble Supreme Court in the case of HCL Comnet Systems and Services Ltd. (2008) 23 (I) ITCL 501 (SC) : (2008) 305 ITR 409 (SC) which has been rendered in the context of section 115JA of the Act. As per sub-section (5) of section 115JB of the Act, which reads as "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". Having regard to expression "save as otherwise provided in this section" used in this sub-section (5) of section 115TB of the Act, we are of the considered opinion that the expression "save as otherwise provided in this section 115JB" clearly means that what is provided in section 115JB should be religiously followed and anything over and above the matter provided in section 115JB will be subject to other provisions of the Act. The provisions of section 115JB have an overriding effect upon other provisions of the Act as is evident from the section itself. The method of computation of book profit provided in the Explanation to section 115JB should be followed while computing the book profit and the normal provisions of computation of profit under any head of the Act shall not be applicable. It is also held by the Karnataka High Court in the case of Jindal Thermal Power Co. Ltd. v. Deputy CIT reported in (2006) 12 (I) ITCL 305 (Karn-HC) : (2006) 286 ITR 182 (Karn), that except for substitution of the tax payable under the provisions and manner of computation of book profits, all the provisions of the tax including the provision relating to charge, definitions, recoveries, payment, assessment, etc., would apply in respect of the provisions of this section and in view of the scheme of the Income Tax Act.

38. It is not the intention of the Legislature to substitute the other provisions of the Act in place of what is specifically made available in section 115JB in so far as the computation of book profit under section 115JB of the Act is concerned. The entire mechanism for the computation of book profit is clearly set out in sub-section (1) of section 115JB read with Explanation thereto. The starting point being the net profit as shown in the profit and loss account prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act but also the items, which are to be increased as stipulated in clauses (a) to (h), and the items, which are to be reduced as specified in clauses (i) to (vii), find separately mentioned in the scheme of the section itself. So, the computation of book profit is to be done strictly as per the Explanation to section 115JB of the Act and hence, no assistance from any other section of the Act can be taken for that purpose. The decisions relied upon by the learned departmental representative in the cases of Apollo Tyres Ltd. (2002) 255 ITR 273 and HCL Comnet Systems and Services Ltd. (2008) 23 (I) ITCL 501 (SC) : (2008) 305 ITR 409 (SC) had clearly laid down a law that the assessing officer has only limited power of making increases and reductions to the net profit shown in the profit and loss account except as provided for in the Explanation to section 115J or 115JA of the Act. In the light of the discussions made above, it is clear