section 115JB Govt grant for modernization of machinery is liable to MAT

By | September 28, 2015

Whether while computing book profit under section 115JB, Central Government grant received by assessee for modernisation of machinery and compensation received from State Government for loss to its compound wall, could  be deducted from net profit computed as per Parts II and III of Schedule VI of Companies Act, 1956 ?

section 115JB

section 115JB

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. In the light of the discussions made above, it is clear that the Assessing Officer, while computing the book profit of a company under section 115JB, 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, and the Assessing Officer thereafter has the limited power of making increases and reductions as provided for in the Explanation to section 115JB. The receipts in question are not covered by any of the clauses (i) to (vii) of Explanation 1 to section 115JB and, it cannot be reduced from book profits under section 115JB. [Para 10]

Complete Judgement on Section 115JB :

[2015] 61 taxmann.com 306 (Chennai – Trib.)

IN THE ITAT CHENNAI BENCH ‘C’

Deputy Commissioner of Income-tax, Corporate Circle-I, Coimbatore

v.

Western India Cashew Company (P.) Ltd.*

CHANDRA POOJARI, ACCOUNTANT MEMBER
AND CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER

IT APPEAL NO. 829 (MDS.) OF 2015
[ASSESSMENT YEAR 2010-11]

AUGUST  12, 2015

A.V. Sreekanth, Jt. CIT for the Appellant. R. Krishnan, CA for the Respondent.

ORDER

Chandra Poojari, Accountant Member – This appeal by the Revenue is directed against the order of the Commissioner of Income-tax(Appeals) dated 28.1.2015.

2. The Revenue has raised the following grounds:

“2. The learned CIT(A) has failed to note that while computing the book profit u/s 115JB of the IT Act, the Assessing Officer has followed the procedure laid in the explanation to proviso to sec. 115JB of the IT Act.

3. The learned CIT(A) ought to have appreciated the fact that the Assessing Officer was right in disallowing the grant-in-aid and compensation received while computing the book profit u/s. 115JB of the IT Act.”

3. The facts of the case are that the assessee received an amount of Rs. 49,92,354/- from the Central Government as machinery grant for the purpose of modernization and diversification of the assessee’s processing plant relating to cashew. The assessee filed the Sanction Letter of Government of India regarding the grant before the AO. According to the assessee, this amount of grant was received for addition to fixed assets, the assessee erroneously accounted it under the head ‘Other Income’ in the Profit & Loss Account, thereby resulting in an overstatement of the revenue profits of the assessee to the extent of Rs. 49,92,354/-. Similar was the case with the amount of compensation received from the State Government towards damages caused to the Compound Wall of the assessee. The amounts received from the State Government was Rs. 64,276/-. It is seen that the profit and loss account was signed on 07.09.2010 for adoption of the Annual General Meeting. The overstatement of profit in the Profit & Loss Account was noticed while filing the return of income in ITR VI on 26.09.2010. Since, the P&L Account was already signed on 07.09.2010, no correction was possible when the assessee noticed the error on 26.09.2010. However, it is to be noted that in the computation of book profits and the return of income, the assessee deducted the amount of Rs. 50,56,630/- from the profits for the purpose of calculation of book profit tax u/s. 115JB. Before the AO, the assessee filed the copy of return of income in which the adjustment was carried out under the head Minimum Alternate Tax (MAT). On verification of the other details from the fixed assets Schedule of the Balance Sheet by the AO, the total additions to Plant and Machinery for the year 2009-10 was Rs. 2,89,35,769/-. As against the above mentioned additions to Plant & Machinery, the amount claimed by the assessee in the income-tax computation was Rs. 1,64,57,309/- only. In the Depreciation Schedule for the income tax computation, an amount of Rs. 1,24,78,460/- was claimed less because the assessee deducted the following items from the additions to plant and machinery:

(i) Grant-in-aid received from the Central Govt. Rs. 49,92,354
(i) Foreign Exchange fluctuation Rs. 74,86,106

3.1 The assessee prepared its Profit & Loss Account as per Part II and III of Schedule VI of the Companies Act, 1956, by treating to its Profit & Loss Account the Govt. grant for machinery acquisition and compensation for loss of assets. While computing the profit u/s 115JB only the profits in the nature of income are liable to tax and not capital receipts. According to the assessee, the receipts which are not taxable under any provisions of the Act cannot also be treated as part of book profits for Section 115JB. The assessee because of the error committed while preparing the Profit & Loss Account (in accounting the machinery grant and compensation for compound wall as Other Income in the P&L Account), the assessee claimed the amount of capital subsidy as deduction u/s 115JB. An item of income which does not come under the purview of income-tax cannot be subjected to tax under any of the provisions of the Act and therefore cannot be included for the purpose of computing book profits u/s 115JB. The Assessing Officer in his order has followed the provisions of Section 115JB and invoked Explanation (1) of proviso to Section 115JB and disallowed the adjustment claimed by the assessee u/s. 115JB. According to the assessee, it was a mistake/error committed by it while crediting the Profit & Loss a/c with the machinery grant received from the Central Government and the compensation received from the State Government, the Assessing Officer also should take into consideration the depreciation claimed by the assessee by reducing the grant-in-aid received from the Central Government for the value of the fixed assets. However, the AO has not agreed with the assessee and considered the above item of receipt for computing the book profit. On the other hand, the CIT(Appeals) directed the Assessing Officer to allow the claim of deduction of Rs. 50,56,630/- as deduction from the book profits and allowed the claim of the assessee. Against this, the Revenue is in appeal before us.

4. The ld. DR submitted that for the purpose of sec. 115JB of the Act, “book profits” means the net profit as shown in the profit and loss account for the relevant previous year prepared in accordance with the provisions of Parts II and II of Schedule VI to the Companies Act, 1956 as increased by the items mentioned as (a) to (j).

5. On the other hand, the ld. AR submitted that while computing the book profits u/s. 115JB, the assessing authority did not deduct an amount of Rs. 49,92,354 which was received from the Central Government as machinery grant by the assessee for the purpose of modernization and diversification of the assessee’s processing plant. The assessee enclosed the sanction letter of the grant. The assessing authority also did not deduct an amount of Rs. 64,276 received from the Government by the assessee as compensation towards damages to its fixed assets. The assessee enclosed the order in this regard for the compensation. The assessee had excluded these amount while computing its book profits under the firm belief that these are capital receipts which are not liable to tax under section 115JB. The intention of section 115JB under the Act is to tax only the ‘normal business profits’ of a company and not to tax the profits other than the normal business profits generated while carrying on the business activities. The assessee placed reliance on the decision of the Tribunal, Calcutta Special Bench, in the case of Sutlej Cotton Mills Ltd. v. Asstt. CIT[1993] 45 ITD 22, wherein the intent of the legislature from the inception of section 8OVVA till the amendments made in this regard to section 115J have been 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 will promote the general legislative purpose underlying the provision. 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 S. 115JB of the Act.

5.1 The ld. AR further submitted that the assessee had prepared its profit and loss account under Part II and Part III of Schedule VI of the Companies Act, 1956 by crediting to its profit and loss account the Government grant for capital assets acquisition and compensation for loss of assets. Only the profits in the nature of income commercially understood can be liable to tax under section l15JB and not capital receipts and compensation for loss of capital assets which may admittedly not be 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-Il of Schedule-VI of the Companies Act deals with the requirement of profit and loss account whereas Part-III deals with its interpretation. The subsidy and compensation receipts cannot be treated as revenue receipts arising from the carrying on the business of the assessee.

5.2 According to the ld. AR, as per the definition of income under S. 2(24) of the Act, income includes any 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 receipts shall not be chargeable to tax under any other provisions of Income-tax Act. The subsidy receipts and compensation receipts by the assessee are not assessed to tax as capital gains. In this regard, the assessee relies the decision of the Supreme Court in the case of CIT v.D.P. Sandu Bros. Chembur (P.) Ltd.[2005] 273 ITR 1 The assessee therefore submits that the receipts which are not taxable under any provisions of the Act cannot be treated as part of book profit under section 115JB and brought to tax. In view of the above, the assessee submits that only operational business income as commercially understood can be liable to tax under S. 115JB and not every credit to the profit and loss account.

5.3 Further, the ld. AR submitted that the explanation to the section 115JB 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, of what is chargeable to tax, is only to be part of the operating business profit, capital and compensation receipts cannot be brought within the meaning of book profits u/s. 115JB. Otherwise, virtually it will mean taxing capital receipt as income which is not the intention of the section 115JB of the Act.

5.4 According to the ld. AR, the assessee has deducted the amount of capital subsidy and the compensation amounts from the additions to plant and machinery and buildings respectively in the depreciation claimed for Income Tax purposes. Therefore the depreciation claimed by the assessee is deficient to the extent of the subsidy and compensation received. Having done so, the assessee cannot be asked to pay book profits tax for this subsidy and compensation which would result in taxing the assessee twice for the same receipts.

5.5 The ld. AR relied on the decision of the ITAT Cochin Bench in Asstt. CIT v. Nilgiri Tea Estate Ltd. 65 SOT 14 and submitted that profit from sale of agricultural land which does not come under purview of ‘capital asset’ as defined u/s 2(14) does not come under the purview of the Act at all and therefore, cannot be included for purpose of computing book profit under section 115JB. An item of income which does come under the purview of income tax cannot be subjected to tax under any of the provisions of the Act. Accordingly, the profit from sale of agricultural land, which is not a ‘capital asset’, was held, cannot be included for the purpose of computing book profit under section 115JB.

5.6 To support his arguments, the ld. AR relied on the following judgements:

1. Cadell Wvg. Mill Co. (P.) Ltd. v. CIT[2001] 249 ITR 265
2. Asstt. CIT v. Mukund Ltd. [IT Appeal No. 304 (Mum.) of 2004]
3. ITO v. Suraj Jewellery (India) Ltd.[2008] 21 SOT 79 (Mum.)
4. ITO v. Frigsales (India) Ltd.[2005] 4 SOT 376 (Mum.)
5. Oriental Containers Ltd. v. Jt. CIT[2008] 19 SOT 30 (Mum.)
6. Sutlej Cotton Mills Ltd. (supra)
7. GKW Ltd. v. Jt. CIT[2000] 74 ITD 161 (Cal.)
7. Hitkari Fibres Ltd. v. Jt. CIT[2004] 90 ITD 654 (Mum.)
9. GKW Ltd. (supra)
10. Nilgiri Tea Estate Ltd. (supra)

6. We have heard both the parties and perused the material on record. 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 above receipts relating to Central and State Government grant. In other words, can a profit and loss account drawn up without considering the above receipts said to be in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act or not ?

7. It is to be noted that the assessee has not made any claim of deduction of these receipts from the book profit, which goes to show that these receipts 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 these receipts 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 these receipts of grant are 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 these receipts in the computation of book profit under the above provision, the assessee is not entitled to the exclusion claimed.

8. It is the case of the assessee that since these receipts arising in relation to capital asset, the same was exempt from tax and it shall not be charged to tax 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 these receipts as exempted under normal provisions of the Act. For this proposition the assessee relied on various judgments. We have 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 Frigsales (India) Ltd. (supra) has not applied the ratio of the decision of the Supreme Court in the case of Apollo Tyres Ltd. v. CIT[2002] 255 ITR 273 . But the fact remains that the propositions laid down by the hon’ble Supreme Court in the case of Apollo Tyres Ltd. (supra) have been reiterated and relied upon by the Supreme Court in the case of CIT v. HCL Comnet Systems & Services Ltd.[2008] 305 ITR 409 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 115JB 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. Dy. CIT[2006] 286 ITR 182that 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.

9. Learned counsel for the assessee did not bring any authority on record for holding that these impugned receipts are to be reduced from the net profit shown in the profit and loss account prepared under the Companies Act for the purpose of computing book profit under section 115JB of the Act. If such reduction is allowed from the net profit determined in the profit and loss account for the purpose of computing “book profit” under section 115JB of the Act, the same would certainly be against the above referred decisions laid down by the honourable Supreme Court in the case of Apollo Tyres Ltd. (supra) and HCL Comnet Systems & Services Ltd. (supra) wherein the powers of the Assessing Officer while computing the book profits for the purpose of section 115J or 115JA were limited as discussed above. The case law relied upon by learned counsel for the assessee, several cases were rendered before the decision of the apex court in the case of Apollo Tyres Ltd.(supra) and HCL Comnet Systems & Services Ltd. (supra) and the rest of the cases, the facts are distinguishable in view of decision of Special Bench, Hyderabad in the case of Rain Commodities Ltd. v. Dy. CIT[2010] 40 SOT 265. Even declaration of dividend is not a must for application of section 115JB. The purpose of this section is to tax companies which were making profits but not paying taxes due to so many exemptions and deductions. The reference to the declaration of dividend in the context of section 115JB by the Finance Minister or by the circulars are merely explanations to the kind of malaise that the section sought to address. For invoking this section, there is no prerequisite condition that the company should have declared dividend to the shareholders.

10. 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. (supra) and HCL Comnet Systems & Services Ltd. (supra) 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 that the Assessing Officer, while computing the book profit of a company under section 115JB of the Act, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having being properly maintained in accordance with the Companies Act, and the Assessing Officer thereafter has the limited power of making increases and reductions as provided for in the Explanation to section 115JB of the Act. These receipts in question are not covered by any of the clauses (i) to (vii) of Explanation 1 to section 115JB of the Act and in our opinion, it cannot be reduced from book profits u/s. 115JB of the Act.

11. In the result, the appeal of the Revenue is allowed.

Leave a Reply