Dharmayug Investments Ltd. The Times of India Bldg., Dr D N Road, Fort Mumbai 400 001 Vs. ACIT Range 1(1) Mumbai
June, 11th 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "D", MUMBAI
Before Shri B R Baskaran, AM & Shri Amit Shukla, JM
Assessment Year : 2009-10
Dharmayug Investments Ltd. ACIT Range 1(1)
The Times of India Bldg., Mumbai
Dr D N Road, Fort Vs.
Mumbai 400 001
Appellant By : Shri A R S Venkatraman
Respondent By : Shri Santosh Kumar
Date of Hearing :19.03.2015 Date of Pronouncement : 10.06.2015
Per Amit Shukla, Judicial Member
The aforesaid appeal has been filed by the assessee against order dated
09.11.2011 passed by the CIT(A) - 1, Mumbai, for the quantum of the assessment
passed u/s. 143(3) for the A.Y. 2009-10. The assessee has raised the following
grounds of appeal to challenge the impugned order:
"1. The Learned CIT(A) erred in holding that in computing the book profit
under section 115JB of the Income Tax Act, 1961 (the Act), the profit on
sale of equity shares of Rs.1,90,39,06,630 ought to be taken and not the
income by way of long term capital gain on sale of equity shares
amounting to Rs.1,72,55,70,760/- as prescribed by the proviso to Section
10(38) of the Act.
2. The assessee submits that the proviso to section 10(38) of the Act is a
charging section and consequently the long term capital gain on sale of
equity shares of Rs.1,72,55,70,760/- is chargeable as book profit under
section 115JB of the Act and not the profit on sale of equity shares of
Rs.1,90,39,06,630 as held by the learned CIT(A)
3. The Learned CIT(A) erred in not allowing the securities transaction tax of
Rs.25,65,015/- as a deduction in computing the book profit under Section
115JB of the Act."
2. The brief facts of the case are that the assessee company is engaged in the
business of investments, leasing and broking business. The return of income was
filed on 29.09.2009 declaring total income of Rs.24,10,290/- under the normal
provisions of the Act. Since the tax liability as per the provisions of section 115JB
was higher, therefore, taxes were paid as per book profit computed u/s. 115JB. As
per the computation of book profit, the income was declared at Rs.21,63,16,156/-.
While computing the tax liability u/s. 115JB, the assessee had shown capital gains
on sale of shares of HDFC Bank in the month of March 2009, which was claimed as
exempt from tax u/s. 10(38) under the normal provisions of the Act. In the
computation of income and notes forming part of computation of income, the
assessee had shown Long term capital gain claimed as exempt u/s. 10(38) at
Rs.1,72,55,70,760/- which was computed in the following manner:
Statement of computation of Capital Gains:
Computation of Long term capital gain on sale of shares of HDFC bank (STT paid)
Sale Proceeds 2,046,906,600
Less : Indexed Cost of Acquisition: 321,335,840
(COA i.e.142,999,970 * CII of year of sale i.e. 582)/CII of
year of purchase i.e. 259) ____________
Long term capital gain exempt u/s. 10(38) 1,725,570,760
In the said notes, the assessee stated that the Long term capital gain to be included
in the book profit should be Rs.1,72,55,70,760/- on the following reason:
"It is our submission that the book profit u/s. 115JB of the Act is to be
computed by reducing the surplus on sale of investments of
Rs.1,90,78,63,394/- and adding the long term capital gain of
Rs.172,55,80,760/- on sale of investments as computed in terms of section 45
to section 55 of the Act. This is line with the Proviso to section 10(38) of the
Act which 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
u/s. 115JB of the Act."
The AO held that the Long term capital gain after indexation and the deduction of
STT paid cannot be accepted for the purpose of computing book profit u/s. 115JB
but the entire sale consideration. Accordingly, he included the entire sum of
Rs.2,04,94,71,614/- while computing the tax u/s. 115JB and for the purpose of
income tax, he computed Long term capital gain was taken at Rs.1,72,81,35,774/-.
3. Before the CIT(A), the assessee submitted that the AO should have
considered capital gain of Rs. 1,72,81,35,774/- for computing the book profit u/s.
115JB instead of Rs.1,90,39,06,630/-. It was submitted that as per the proviso to
section 10(38), the income by way of Long term capital gain should be taken into
account in computing the book profit and income tax payable u/s. 115JB and said
Long term capital gain is admittedly at Rs. 1,72,55,70,760/-. However, the learned
CIT(A) did not accept the assessee's contention that the amount of capital gain of
Rs. 1,72,81,35,774/- should be calculated after giving effect of the indexation
provision as required u/s. 48. He held that under section 115JB, book profit is to be
calculated as per the Profit & loss account prepared by the assessee. Since the
assessee has credited Rs. 1,90,39,06,630/- in the Profit & loss account as capital
gain on sale of shares, therefore, this amount alone has to be taken as Long term
capital gain for the purpose of computing the book profit. In support of his
contention, he relied upon the ratio laid down by Hon'ble Apex Court in the case of
Apollo Tyres Ltd. [255 ITR 273].
4. Before us, the learned counsel, Shri A R S Venkatraman, submitted that the
company had sold shares of HDFC Bank Ltd. and had thereby earned surplus of
Rs.1,90,78,63,394/-, which was credited to the Profit & loss account. Since it was a
Long term capital gain asset therefore, in view of the provisions of sections 45 to
55, the said Long term capital gain has to be computed accordingly. Admittedly,
the Long term capital gain that works out to Rs.1,72,55,70,760/- was claimed as
exempt u/s. 10(38). He drew out attention to the definition of income, which
includes capital gain which is chargeable u/s. 45. U/s. 45 only profits or gains
arising from the transfer of capital asset alone can be taxed. Such a computation of
profits and gains arising out of transfer of a capital asset has been given in section
48, which includes indexed cost of acquisition. He further drew our attention to the
legislative history of section 10(38) and corresponding amendment in section115JB.
He submitted that proviso to section 10(38) makes it abundantly clear that the
income by way of Long term capital gain is to be taken into account while
computing the book profit and income tax payable u/s. 115JB. This proviso was
inserted by the Finance Act 2006 w.e.f. 01.04.2007. Simultaneously, amendment
was brought in section 115JB also in clause (ii) to Explanation (1) in section 115JB.
Thus, what is contemplated under the relevant provision is the income by way of
Long term capital gain and such Long term capital gain means gains computed u/s.
48 to section 55. The proviso to section 10 should be read as substantive part of
the section because it qualifies generality of the main enactment and it has to be
read and construed harmoniously with the main enactment. In support of this
contention, he strongly relied upon the decision of Hon'ble Supreme Court in the
case of CIT vs. Indo Mercantile Bank Ltd. [36 ITR 1] and CCT vs. Ramkishan
Shrikishan Jhaver & Ors [66 ITR 664]. Thus, he submitted that Long term capital
gain, which is to be included in computation of book profit should be after
indexation as computed u/s. 48 to 55.
5. As an alternative, he submitted that in ground no.3, the assessee has
challenged that STT of Rs. 25,65,015/- should be allowed as deduction while
computing book profit u/s. 115JB. The assessee while crediting the net gain from
sale of shares has deducted the said amount i.e. Rs.1,90,39,06,630/-, which was
credited to the Profit & loss account was net of STT.
6. On the other hand, the learned DR, strongly relied upon the order of the
CIT(A) and submitted that u/s. 115JB, it is mandatory for the assessee to prepare
its Profit & loss account as per the Companies Act and the assessee has credited the
net gain on sale of shares at Rs.1,90,39,06,630/- in the Profit & loss account, which
alone should be taken as income for the purpose of section 115JB.
7. We have heard the rival submissions and have also perused the relevant
material placed on record. During the year ending on 31.03.2009, the assessee
company had sold shares and thereby earned a surplus of Rs. 1,90,78,63,394/-,
which was net of STT paid. This amount was credited to the Profit & loss account
which is evident from the Schedule of income as given at page 2 of the paper-book
and credited to the balance sheet as on 31.03.2009. In the computation of book
profit u/s. 115JB, the assessee had made a note stating that the Long term capital
gain should be taken at Rs. 1,72,55,70,760/-, which is after indexation. The main
issue before us is that while computing the book profit u/s. 115JB the income on
account of Long term capital gain should include, Rs. 1,90,39,06,630/- i.e. net
amount credited or the sum of Rs. 1,72,55,70,760/- computed after indexation.
Section 1115JB is non-obstante section and a complete code by itself, which
provides that in case of a company, the income tax payable on the total income is
computed under the Income tax Act in respect of any previous year is less than
7.5% (which percentage has been increased from time to time) of its book profit,
then such book profit shall be deemed to be the total income of the assessee and
tax payable for the relevant previous year shall be such percentage of book profit.
It further lays down that every assessee for the purpose of this section "shall"
prepare its Profit & loss account for the relevant previous year in accordance with
the provisions of part II & III of Schedule 6 of the Companies Act, 1956. Thus, for
computing the profit and the taxability u/s. 115JB, it is mandatory for the assessee
to compute profit as per Profit & loss account prepared under the relevant
provisions of the Companies Act. The relevant Schedule under the Companies Act
for the preparation of statement of Profit & loss account provides that in case of
sale of investments, net gain/loss should be disclosed. The net gain/loss means
sale minus purchase and other cost. The Companies Act does not speak about Long
term/ Short term capital gain. In accordance with the requirements of the
Companies Act, the assessee has credited the net profit on sale of investment i.e.
net gain on shares of HDFC Bank at Rs. 1,90,78,63,394/-,. Accordingly, this amount
has been credited in the Profit & loss account. `Explanation' to subsection (2) of
section 115JB provides that, book profit means the net profit as shown in the Profit
& loss account (which has been prepared in accordance with the provisions of parts
II & III of Schedule 6 to the Companies Act, 1956) and as increased or reduced by
certain adjustments as specified in the said explanation. By the Finance Act 2006,
w.e.f. 01.04.2007, Clause (f) has been amended to provide that book profit shall be
increased by the amount or amounts of expenditure relatable to any income
referred to in section 10. However, specific exclusion to the income referred to in
sub section (38) of section 10 has been provided. Similar amendment has been
brought in clause (ii) of the said Explanation to provide that book profits shall be
reduced by the amount of income referred to in section 10. Here also specific
exclusion to the income referred to in clause (38) has been made. A simultaneous
amendment has also been brought in 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 u/s. 115JB. 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. In other words, section
10(38) provides that income arising from transfer of a long term capital asset will
not be included in the total income. The `proviso' provides an exception to the said
section, which envisages that for the purpose of computing the book profit the
income by way of Long term capital gain shall be taken into account on which tax is
payable u/s. 115JB. This is in consonance with the amendment brought in section
115JB. From the harmonious reading of the relevant provision 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. Thus, the income arising from
transfer of long term capital asset is to be included in the book profit. The book
profits as contemplated in section 115JB means the net profit, which has been
shown/credited in the profit & loss account as 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. It does not speak of Long term capital gain or
Short term capital gain. Thus, while computing the book profit, income u/s. 10(38)
will not be reduced and this income here would mean income credited to the Profit
& loss account. Once, Explanation to section 115JB provides that the amount of
income which is to be reduced or not, which inter alia means any such amount
which is credited to the Profit & loss account then only such amount credited in the
Profit & loss account shall alone be taken into consideration for computing the book
profit. The concept of indexation while computing the Long term capital gain
cannot be imported to the computation of book profit u/s. 115JB as per the
expressed provisions of the said section itself which is a complete code in itself.
Thus, in our opinion, the net amount on account of sale of shares of Rs.
1,90,39,06,630/- will alone be taken into account in computation of book profit and
not the amount of Long term capital gain of Rs. 1,72,55,70,760/-after indexation.
Thus, the assessee's ground on this score stands dismissed.
8. Coming to the 3rd ground, that the learned CIT(A) and the AO have erred in
not allowing the STT of Rs.25,65,015/- as deduction in computing the book profit
u/s. 115JB. Here we agree with the contention of the learned counsel, because the
assessee in the Profit & loss account has credited the net gain after net off of STT
of Rs.25,65,015/-. Thus, the STT amount will not be included in the computation of
book profit and only the net gain of Rs.1,90,39,06,630/- shall alone be taken into
account. Accordingly, ground no.3 of the assessee is allowed.
9. In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on this day of 10th June 2015.
(B R Baskaran) (Amit Shukla)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai; Dated :10th June, 2015.
Copy of the Order forwarded to :
1. The Appellant.
2. The Respondent.
3. The CIT(A), Mumbai.
4. The CIT
5. The DR, `D' Bench, ITAT, Mumbai
Income Tax Appellate Tribunal, Mumbai