03 June 2011
NO WAY THE BOOK PROFIT IS NOT TO BE DECREASED BY THE AMOUNT OF INCOME REFERRED TO IN SECTION 10(38) EVEN IF U TAKE LTCG DIRECTLY TO BALANCE SHEET THEN ALSO COURTS HAVE OPINED NEGATIVELY REFER TO THE FOLLOWING In Dy. CIT v. Bombay Diamond Co. Ltd. (2010) 32 (I) ITCL 456 (Mum-HC), the assessee has made investment in the rights in booked premises at Bharat Diamond Bourse in the preceding years. The said rights were sold during the year and the assessee earned a profit of Rs. 10,38,13,765 which was taken directly to the balance sheet as "capital reserve" without routing the same through the profit and loss account. The assessee did not consider the above amount as a part of book profit under section 115JB of the Act. On being questioned by the assessing officer it was submitted that since the rights in booked premises were held as capital asset, the profit arising from the sale thereof was not credited to the profit and loss account. It was submitted that the surplus of Rs. 10,38,13,765 arising on the sale of the rights in the booked premises did not constitute trading profit. It was further submitted that the accounts of the assessee company were duly certified by the auditors and the same have been adopted in the AGM. The said audited accounts were filed with RoC.
However, the assessing officer was not convinced with the above submissions of the assessee. Referring to the provisions of Companies Act, he observed that every company has to prepare its accounts in the manner provided in Part II and Part III of Schedule VI to the Companies Act. He extracted Part II and Part III of the Schedule VI to the Companies Act relating to requirement as to P&L a/c in the assessment order and observed that the assessee-company has clearly violated the provisions of sub-clause (xi)(a) of clause (3) of Part II of the Schedule VI. He further held that the assessee company had not prepared its profit and loss account in accordance with the provisions of Part II and Part III of Schedule VI to the Companies Act. He accordingly recomputed the book profit for the purpose of section 115JB of the Act and computed the book profit at Rs. 7,61,36,607.
It was held that from a bare reading of Part II and Part III of Schedule VI to the Companies Act, 1956 it is clear that the profit and loss account of a company shall disclose every material feature including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of exceptional nature also. 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 transactions of a kind not usually undertaken by the company or undertaken in circumstances of exceptional or non-recurring nature if material in amount.
The issue before the Honble Supreme Court in the case of Appollo Tyres Ltd. (supra) was under the provisions of section 115J and when the accounts of the company are prepared in accordance with the requirements of Part II and Part III of Schedule VI to the Companies Act. However, in the instant case the issue is relating to the provisions of section 115JB and the accounts are not prepared in accordance with the provisions of Part II and Part III of Schedule VI to the Companies Act. Merely because the auditors have certified the accounts which apparently are not prepared in accordance with Part II and Part III of Schedule VI to the Companies Act, therefore, the decision of Honble Supreme Court in the case of Apollo Tyres Ltd. (supra), in our opinion is not applicable to the facts of the present case.
In the instant case the assessee has bypassed the provisions of Part II and Part III of Schedule VI of the Companies Act and directly credited the profit to the reserve account. The assessing officer cannot go beyond the book profits as per the audited accounts provided they are prepared as per the manner provided in Part II and Part III of Schedule VI to the Companies Act, 1956 and are adopted in the AGM. However, in the instant case, admittedly the accounts are not prepared in the manner provided in Part II and Part III of Sch. VI to the Companies Act, 1956 since the profit on sale of investments amounting to Rs. 10,38,13,765 which is a material amount, has not been routed through the P&L a/c. Therefore, the assessing officer, has the power to re-work the book profit by recasting the accounts in the manner provided as per Part II and Part III of Sch. VI to the Companies Act, 1956.
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