IN THE HIGH COURT OF KERALA AT ERNAKULAM
ITA.No. 79 of 2002()
1. M/S. N.J.JOSE & CO. (P) LTD.,
... Petitioner
Vs
1. ASSISTANT COMMISSIONER OF INCOME TAX,
... Respondent
2. THE COMMISSIONER OF INCOME TAX,
For Petitioner :SRI.P.BALACHANDRAN
For Respondent :SRI.P.K.R.MENON(SR.),SC FOR IT
The Hon'ble MR. Justice C.N.RAMACHANDRAN NAIR
The Hon'ble MR. Justice T.R.RAMACHANDRAN NAIR
Dated :20/02/2008
O R D E R
C.N. Ramachandran Nair &
T.R. Ramachandran Nair, JJ.
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I.T.A.NO.79 of 2002
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Dated this the 20th day of February, 2008.
JUDGMENT
C.N. Ramachandran Nair, J.
This is an appeal filed by the assessee under Section 260-A of the
Income Tax Act challenging the order of the Income Tax Appellate 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:
“1. Whether on the facts and in the circumstances of the case, the
appellate tribunal was justified in law in holding that the capital
gains is part of the book profits under Section 115J of Income Tax
Act, 1961?
2. Whether there were materials for the appellate 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 under section 115J of the Act?”
During the previous year relevant for the assessment year 1989-90, among
other items, the appellant has substantial income of Rs.26,03,245/- being
long term capital gains. The assessee claimed relief under Section 54E of
the Act on the income from long term capital gains by depositing amounts
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in specified assets in terms of the said provision. However, after
computation of income including income from capital gains and after
granting exemption under Sec.54E, the assessing officer found that the total
income so computed is less than 30% of book profit and therefore the
assessing officer proceeded to make assessment on book profit authorised
under Section 115J of the Act. In the computation of book profit under
Section 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 assessing officer rejected the claim and reckoned the book profit
including long term capital gains for the purpose of assessment under
Section 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
forms part of book profit. It is against this order of the Tribunal, the
assessee filed this appeal raising the above questions.
2. 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 under Section 45 of the Act is a profit arising on transfer of capital
assets and though chargeable to income tax, the benefit of
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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 under Section 115J of the Act. According to him, there
is nothing in Chapter XIIB providing for disallowance of eligible
exemption under Section 54E of the Act on capital gains in the course of
assessment based on book profit.
3. 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 under Section 115J(1A) of the
Act. We are unable to accept the contention of the assessee, because
assessment under Chapter XIIB on book profit is a self contained code. The
scheme thereunder is to adopt the profit and loss account 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 under Section 115J overrides other provisions of the Act. In
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fact, the assessing officer gets jurisdiction to make assessment under
Section 115J of the Act only when the total income computed under the
provisions of the Act is below 30% 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 assessing officer finds
that total income as computed under the provisions of the Act is less than
30% of the book profit, he has to give up normal assessment and proceed to
make the assessing officer has to opt for the assessment under Section 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 gains is not profit
includible in the profit and loss account prepared in terms of Schedule VI
of the Companies Act. Since there is no provision in Chapter XIIB 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 Commissioner of Income Tax v. Veekaylal Investment Co.
P. Ltd. (249 ITR 597) also took the view that capital gains is part of profit
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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
under Section 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 profit and loss account prepared under Chapter VI of the
Companies Act, it cannot be excluded unless so provided under Explanation
to Section 115J(1)A 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,
Sec.54E has no application in the computation of book profit under
Sec.115J.
We, therefore, answer the questions raised against the assessee and
uphold the order of the Tribunal. The appeal is accordingly dismissed.
(C.N. Ramachandran Nair, Judge.)
(T.R. Ramachandran Nair, Judge.)
kav/
ITA 79/2002 -6-
C.N. Ramachandran Nair &
T.R. Ramachandran Nair, JJ.
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I.T.A.No.79 of 2002.
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JUDGMENT
20th February, 2008.