S. H. Kapadia. J.
1. 1. Being aggrieved by the decision of the Tribunal, the Department has filed this appeal under section 260A of the Income Tax Act.
2. The substantial question of law which arises for determination is as follows:
(a) Whether the income from capital gains should be included for the purposes of computing book profits under section 115J of the Income Tax Act?
3. The above appeals raise common question of law. Hence, they are disposed of by this Judgment, For the sake of convenience, we arc relying Upon facts in Income Tax Appeal No. 27 of 2000.
FACTS :
4. The asscssee M/s. Veekaylal Investments Co. Pvt. Ltd. filed its return of income for the Assessment Year 1989-90 declaring a net less of Rs. 29.120. During the previous year relevant to the above Assessment Year 1989-90. the asscssee sold part of the land admeasuring 36,693 sq. yards to Manish Builders, Bacchubhai Parekh and S. N. Apte and others, in the return of income, the assessee treated the income derived from the above property as long term capital gains and offered Rs. 2.70 lacs for taxation. The assessee was carrying on business of investment. The AO came to the conclusion that the profits arising from transfer of above lands would have to be charged as capital gains under section 45 and not under section 28. It was further observed that as per profit and loss account for the period 31st March, 1989, the asscssee earned a net profit of Rs. 12,76,119/-. However, the assessee did not offer any income under section 115J of the Income Tax Act on the ground that under section 115J, one has to take commercial profits and if any receipt had no commercial profit clement, then such receipt would have to be excluded for the purposes of section 115J. That, commercial profits or book profits under section 115J would not include capital gains. The AO rejected the above contention. Being aggrieved, the assessee preferred an appeal before CIT (Appeals) who agreed with the view of the AO. Therefore, the assessee went in appeal to the Tribunal. The Tribunal took the view that under the Income Tax Act, capital gain is deemed to be income under section 45. That, the said section was a deeming provision. That, the said section applied only to the limited extent. That, what is deemed to be income under Section 45 is not income for book profits and, therefore, the Tribunal held in favour of the assessee. In this connection, the Tribunal followed the Judgment of the Special Bench, Calcutta, in the case of Sutlej Cotton Mills Ltd. v. Assistant Commissioner of Income Tax,'. Being aggrieved, the Department has filed this appeal.
ARGUMENTS :
5. Mr. Desai, learned -Senior Counsel appearing on behalf of the Department, contended that section 115J related to certain Companies. That, it forms part of Chapter 12B. That section 115J begins with non-obstante clause. He contended that the said section was introduced by Finance Act, 1987. That, by virtue of the said section, it is provided that in the case of a Company whose total income, as computed under the Act, is less than 3O% of the book profits computed under that section then the total income chargeable to tax will be 30% of the book profits as computed. That, for the purposes of section 115J book profits will be the net profits as shown in the profit and loss account prepared in accordance with Schedule VI to the Companies Act. 1956 after certain adjustments. Mr. Desai contended that section 115J(1) emphasises the expression 'total income'. He contended that this expression covers capital gains which are deemed to be income in lieu of section 45 of the Income Tax Act. Mr. Desai invited our attention also to Parts II and III of Schedule VI of the Companies Act, 1956. He pointed out that clause 3 of Part II indicates the items which will fall in the profit and loss account. He contended that reading the said items, it is clear that the assessee was required to disclose credits or receipts and debits or expenses in respect of nonrecurring transactions or transactions of exceptional nature. He also relied upon clause 3 which, inter alia, refers to various items which would form part of profit and loss accounts and which every Company was required to disclose in its profits and loss account. In this connection, he placed reliance on item (xii) of clause 3. Mr. Desai accordingly contended that the Tribunal erred in coming to the conlusion that capital gains under section 45 of the Income Tax Act cannot be considered for computing book profits under section 115J.
6. Mr. Jasani, learned Advocate appearing on behalf of the assessee, on the other hand, contended that section 115J was introduced by Finance Act, 1987 in order to restrict unwarranted deductions claimed by the assessees. He invited our attention to various items enumerated in Parts II and III of Schedule VI of the Companies Act and he contended that all the said items in clause 3 of Part It of Schedule VI indicated that book profits, essentially, were commercial profits. That, the said items in clause 3, essentially, referred to the working results of the Company. He contended that on the other hand, receipt of capital gains resulted in a change in the capital structure of the Company. That, capital gains have not been contemplated by clause 3 of Part II of Schedule VI to the Companies Act. That, under clause 3, the items enumerated only deal with working results of the Company. They do not touch upon the capital structure of the Company. That, according to the accounting practice, a capital surplus can be taken directly to the balance sheet or it can be taken through the profit and loss accounts. However, such capital surplus will not change the working results of the Company in either case. He contended that as per the accounting practice, the company was free to lake the capital surplus directly to the balance sheet and not via profit and loss account. He relied upon the statement in Spicer and Pegler's Book Keeping and Accounts (Seventh Edition) page 311 indicating that realised capital surplus could be passed through the profit and loss account or alternatively directly charged to the account in which the surplus is credited in the balance sheet. He also relied upon the Judgment of the Special Bench in Sutlej Cotton Mills Ltd. (supra) in support of his above contention. He accordingly contended that, in the present case, the Tribunal was justified in holding that the capital gains cannot be considered for computing book profits under section 115J.
FINDINGS :
7. We find merit in this appeal. According to section 115J(1), in the case of an assessee being a Company if the total income is less than 30% of Its book profits then the total income of such Company shall be deemed to be an amount equal to 30% of such book profit and such income shall be chargeable to tax. That, the assessee has to first compute the total income in accordance with the Income Tax Act and if the total income is less than 30% of the book profit then the assessee has to prepare a profit and loss account for the previous year in accordance with Part II and III of Schedule VI to the Companies Act. In other words, a plain reading of section 115J shows that if the assessee is a Company and its total income under the Income Tax Act is less than 30% of its book profits then, fictionally, it will be deemed that its total income chargeable to tax would be an amount equal to 30% of such book profits. Hence, in such a case, the total income of the assessee is first required to be computed under the Income Tax Act and if the total income so computed is less than 30% of the book profits then the profit and loss account shall have to be prepared in accordance with Part II and Part III of Schedule VI of the Companies Act. 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 Income Tax Act. In the circumstances, one fails to understand as to how in computing the book profits under the Companies Act, the assessee Company cannot consider capital gains for the purposes of computing book profits under section 115J of the Act. Further, under clause (2) of Part II of Schedule VI to the Companies Act where a Company receives the amount on account of surrender of leasehold rights, the Company is bound to disclose in the profit and loss account the said amount as non-recurring transaction or a transaction of an exceptional nature Irrespective of its nature i.e. whether capital or revenue. That, it would be inappropriate to directly transfer such amount to capital reserve [see Companies Act by A. Ramaiya, page 1669 [Fourteenth Edition). Such receipts are also covered by clause 2(b) of Part II of Schedule VI of the Companies Act which, inter olio, states that 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. Lastly, even under clause 3(xii)(b) profits or losses in respect of transactions not usually undertaken by the Company or undertaken in circumstances of exceptional or non-recurring nature shows clearly that capital gains should be included for the purposes of computing book profits. That, capital gains would certainly be one of the various items whose information is required to be given to the share holders under the said clause 3(xii)(b). So also, the disclosure is required to be made in respect of Investment in the capital of a partnership firm If the Company is a partner on the date of the balance sheet (seepage 1651 of the Companies Act by A. Ramaiya [Fourteenth Edition]). Similarly, profits or losses on such investments are also required to be disclosed, (see clause 3(xii)(a) of Partk II of Schedule VI of the Companies Act).
8. In the circumstances, the question is answered in the affirmative i.e. in favour of Department and against the assessee.
C.C. expedited.