Section 115JB profit arising on sale of share

By | July 28, 2015

IN THE ITAT MUMBAI BENCH ‘D’

Dharmayug Investments Ltd.

v.

Assistant Commissioner of Income-tax, Range 1 (1), Mumbai

B.R. BASKARAN, ACCOUNTANT MEMBER
AND AMIT SHUKLA, JUDICIAL MEMBER

IT APPEAL NO. 1284 (MUM.) OF 2013
[ASSESSMENT YEAR 2009-10]

JUNE  10, 2015

While computing book profits under Section 115JB whether profit arising on sale of shares ought to be taken or the income by way of long-term capital gain is to be considered?

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Answer The book profit under Section 115JB shall be reduced by the amount of income to which provision of section 10 applies. However, income under the provisions contained in section 10(38) will not be reduced. The concept of indexation while computing the long-term capital gain cannot be imported into the computation of book profit under Section 115JB.

The assessee argued that income by way of long-term capital gain was to be taken into account while computing book profits and not the profit on sale of shares. Its arguments were based on the ground that proviso to Section 10(38) requires that “income by way of long-term capital gain” shall be taken into account in computing the book profit and the income-tax payable under Section 115JB.

The revenue on the other hand was of the view that while computing book profit under section 115JB, it is mandatory for the assessee to prepare its Profit & loss account as per the Companies Act. Thus, profit shown in profit and loss account would be considered while computing book profit and not the income by way of long-term capital gain.

The Tribunal held in favour of revenue as under:

(1) As per Section 115Jb book profits mean the net profit as shown in the profit & loss account which is prepared under the relevant provisions of the Companies Act. Under the Companies Act only the net gain/loss from sale of shares is to be included as Companies Act does not speak of Long-term capital gain or Short-term capital gain.
(2) Section 115JB was amended by the Finance Act 2006 to provide that MAT would be applicable on income referred to in sub-section (38) of section 10. A simultaneous amendment has also been made to section 10(38) by the insertion of the ‘proviso’ whereby it has been provided that income by way of Long-term capital gain of a company shall be taken into account in computing the book profit and the income-tax payable under Section 115JB.
(3) Section 10(38) provides that any income arising from the transfer of a long-term capital asset as specified therein shall not be included in the computation of the total income of the previous year. The ‘proviso’ added by Finance Act, 2006 provides an exception.
(4) From the harmonious reading of the relevant provisions (as discussed above) it is evident that firstly, the book profit shall be reduced by the amount of income to which provision of section 10 applies. However, income under the provisions contained in section 10(38) will not be reduced.
(5) Explanation to Section 115JB provides that the amount of income which is to be reduced means any such amount which is credited to the profit and loss account, therefore, only such amount credited in the profit and loss account shall be taken into consideration while computing the book profit. The concept of indexation while computing the long-term capital gain cannot be imported into the computation of book profit under Section 115JB.
(6) Thus, the income (i.e., actual gain) arising from transfer of long-term capital asset is to be included in the book profit and not the long-term capital gain computed for tax purposes.

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