N.J. Jose and Co. (P) Ltd. vs Assistant Commissioner of Income Tax and Another

C.N. Ramachandran Nair, J.—This is an appeal filed by the assessee u/s 260A of the IT Act, challenging the order of the Tribunal disposing of the appeal filed against the assessment for the year 1989-90. The substantial questions of law arising from the order under challenge are the following:

Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the capital gains is part of the book profits u/s 115J of IT Act, 1961?.

Whether there were materials for the Tribunal to hold that even though Section 115J is a deeming provision the long-term capital gain which itself is deemed income and which is saved by the operation of Section 54E is liable to be included in the book profit u/s 115J of the Act?

During the previous year relevant for the asst. yr. 1989-90, among other items, the appellant has substantial income of Rs. 26,03,245 being long-term capital gains. The assessee claimed relief u/s 54E of the Act on the income from long-term capital gains by depositing amounts in specified assets in terms of the said provision. However, after computation of income including income from capital gains and after granting exemption u/s 54E, the AO found that the total income so computed is less than 30 per cent of book profit and therefore the AO proceeded to make assessment on book profit authorised u/s 115J of the Act. In the computation of book profit u/s 115J of the Act, the assessee claimed exclusion of capital gains because of exemption available on it by virtue of Section 54E of the Act. The AO rejected the claim and reckoned the book profit including long-term capital gains for the purpose of assessment u/s 115J of the Act. Even though the assessee was successful in first appeal, the Tribunal on second appeal filed by the Department, reversed the order of the first appellate authority and held that long-term capital gains form part of book profit. It is against this order of the Tribunal, the assessee filed this appeal raising the above questions.

We have heard Shri P. Balachandran, learned senior Counsel for the appellant and Shri P.K.R. Menon, learned senior Counsel for the respondent. Learned senior Counsel for the assessee contended that capital gains u/s 45 of the Act is a profit arising on transfer of capital assets and though chargeable to Income Tax, the benefit of deduction/exemption available on investments made in specified assets in terms of Section 54E of the Act, cannot be denied to the assessee even if assessment is made u/s 115J of the Act. According to him, there is nothing in Chapter XII-B providing for disallowance of eligible exemption u/s 54E of the Act on capital gains in the course of assessment based on book profit.

Learned senior Counsel appearing for the Revenue, on the other hand contended that no deduction can be allowed in the computation of book profit except to the extent permissible u/s 115J(1A) of the Act. We are unable to accept the contention of the assessee, because assessment under Chapter XII-B on book profit is a self contained code. The scheme there under is to adopt the P & L a/c 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 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 u/s 115J overrides other provisions of the Act. In fact, the AO gets jurisdiction to make assessment u/s 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 AO 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 proceed to make assessment. The AO has to opt for the assessment u/s 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 gain is not profit includible in the P & L a/c prepared in terms of Schedule VI of 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 The Commissioner of Income Tax, Mumbai City-II Vs. M/s. Veekaylal Investment Co. P. Ltd., 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 claim of exemption on capital gains u/s 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 P & L a/c prepared under Chapter VI of the Companies Act, it cannot be excluded unless so provided under 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, assessee is not entitled to the exclusion claimed. In other words, Section 54E has no application in the computation of book profit u/s 115J.

We, there fore, answer the questions raised against the assessee and uphold the order of the Tribunal. The appeal is accordingly dismissed.