DCIT C.C. 25, MUMBAI vs. SKIL INFRASTRUCTURE LTD, MUMBAI

The Captioned appeal by revenue for Assessment Year [AY] 2005-06 assails the order of Ld. Commissioner of Income Tax (Appeals)-Central- V [CIT(A)], Mumbai dated 12/03/2009 qua computation of book profits u/s 115JB consequent to capital gains on sale of certain shares. The main issue under dispute is adjustment to book profits u/s 115JB vis-a- vis conversion of certain investments into stock-in-trade and capital gains / business income/loss arising there-from at the time of sale.

As per record, the assessee namely SKIL Infrastructure Limited has amalgamated with Horizon Infrastructure Ltd. w.e.f. 01/04/2011 as per order of Hon’ble Bombay High Court dated 27/09/2013, a copy of which has been placed before us. Thereafter, Horizon Infrastructure Ltd. has changed its name w.e.f. 22/01/2014 to SKIL Infrastructure Ltd. (CIN L36911MH1983PLC178299) vide fresh certificate of incorporation consequent upon change of name issued by Registrar of Companies, Maharashtra dated 22/01/2014 which is taken on record. With this background, we proceed further in the matter.

Briefly stated the assessee, being resident corporate assessee, engaged in the business of infrastructure development and technical consultancy relating to infrastructure development, was assessed u/s 143(3) at loss of Rs.208.75 Crores under normal provisions and at book profit of Rs.141.63 crores u/s 115JB as against returned loss of Rs.209.33 crores filed by the assessee in 29/10/2005. ski invasrocture Lined

The assessee claimed Long Term Capital Gains as exempt u/s 10(23G) for Rs.343.97 crores on sale of 5,11,27,400 number of shares of Gujarat Pipavav Port Ltd. [GPPL]. These shares were earlier held as investment but converted from investment to stock-in-trade in AY 2002- 03 at fair market value of Rs.80/- per shares as against average cost of Rs.12.72 per equity shares. The surplus thus arising for Rs.67.28 per equity share aggregating to Rs.343.97crores was credited to capital reserve account in AY 2002-03 at the time of conversion. To support the market value of Rs.80/- in the year of conversion, the assessee explained that the shares were purchased at the same price by Unit Trust of India & New York Life International India Fund Mauritius LLC. The copies of agreement for purchase of shares of GPPL by UTI and New York Life were furnished to AO.

The shares in question were sold during impugned AY i.e. on 30/03/2005 @ Rs. 40/- per share to consortium of investors led by APMT Mauritius Ltd. resulting into business loss of Rs.40/- per share aggregating to Rs.204.50 crores which was debited to Capital Reserve Account but claimed as business loss in the computation of income.

The Long Term Capital Gains claimed exempted u/s 10(23G) was found acceptable during the assessment proceedings in terms of statutory provisions and CBDT circular No. 772 dated 23/12/1998. 7. However, the Ld. AO proposed to include the exempt Long Term Capital Gains of Rs.343.97 crores for the purpose of computation of book profits u/s 115JB which was objected to by the assessee on the ground that the capital gains, whatever accrued to the assessee in the impugned AY, was recorded in the year of conversion i.e. AY 2002-03 itself and carried to capital reserve account having regard to the provisions of Part Ill of Schedule VI to the Companies Act, 1956. Further, bifurcation of gains / losses was done only in accordance with the provisions of Section 45(2). The Long Term Capital Gains so arrived was exempt u/s 10(23G) which led to this peculiar situation where there was no credit to Profit & Loss Account and yet there was a Long Term Capital Gain exempt u/s 10(23G) which was only due to the provisions of Section 45(2). Further, upon conjoint reading of proviso to Section 10(23G) & Section 115JB(2), no adjustment was called for this item. However, not convinced, Ld. AO added the amount of Capital Gains of Rs.343.97 crores to Book Profits u/s 115JB and reduced the Business Loss of Rs.204.50 Crores from the same and arrived at adjusted book profits of Rs.141.63 crores.

Aggrieved, the assessee carried the matter before Ld. CIT(A) successfully vide impugned order dated 12/03/2009 and raised similar pleas and placed reliance on the judgment of Apex court in Apollo Tyres Ltd. Vs. CIT [255 ITR 273] to contend that AO had no power to make adjustments in the Profit & Loss Account prepared in accordance with Part Il & Part Ill of Schedule VI of the Companies Act. After considering the statutory provisions, submissions made by the assessee and material on record, Ld. CIT(A) was convinced with the arguments of the assessee and decided the issue in favor of assessee with following observations:-

| have considered the assessment order and the submissions of the appellant.

2 | also find that the unique nature of Long Term Capital Gain arising out of operation of section 45(2) of the ITA also should have been factored by the Assessing Officer. The peculiar nature of the incomes arising out of section 45(2) of the ITA creates a situation where the period of accounting treatment of the conversion given in the accounts is different from the period in which Long Term Capital gains becomes taxable. It is because of this that the appellant did not have Skil Infrastructure Limited to credit the surplus arising out of the conversion to the Profit and Loss account during the assessment year under consideration. Once this happened, the Long Term Capital gain being relatable to an earlier year went outside the purview of section 115JB of the ITA for the assessment year under consideration. Had the Long Term Capital Gain arisen u/s 45(1) of the ITA, its direct incidence would have been in the contemporaneous year and accordingly section 10(23G) and sub clause (ii) of Explanation to section 115JB of the ITA would have been in harmony. As against this, in the appellant's case, this harmony is missing since in its case, whereas the Long Term Capital Gain u/s 45(2) had its accounting implications during the assessment year 2002-03, it had its Capital Gain incidence during the assessment year 2005-06. In this respect, the appellant's reliance on the decisions on interpretation of statutes is apt and appropriate. As mentioned by the Hon'ble 2.3.3 In the light of the foregoing, | find that there is no case for addition of the Long Term Capital Gain of Rs.343,97,14,143/- to the book profit u/s 115JB of the ITA. The addition is deleted and the ground of appeal is allowed.

The Ld. Departmental Representative [DR] drew our attention to the provisions of Section 10(23G) and contended that the income arising under these provisions was clearly includible for the purpose of book profits u/s 115JB. Further, no adjustment of this income was required to be done in terms of Explanation-1 to Section 115JB. Therefore, the assessee was under an obligation to credit the surplus to Profit & Loss Account but failed to do so and therefore, AO rightly added the same to Book Profits u/s 115JB.

Per contra, Ld. AR placed reliance on the findings of Ld. CIT(A) and raised similar contentions and explained that the assessee

We have heard the rival contentions and perused relevant material on record including cited case laws. The undisputed facts are that the assessee has earned certain Long Term Capital Gains on certain shares which were converted from investment into stock-in-trade during AY 2002-03 but finally sold in impugned AY and therefore, taxable as per the provisions of Section 45(2). The fair market value of Rs.80/- per share adopted by the assessee in the year of conversion and final sale value of Rs.40/- per share earned by the assessee is nowhere in dispute. The resultant surplus upon conversion amounting to Rs.343.97 Lacs has been transferred to Capital Reserve Account as per the requirement of Schedule VI of the Companies Act.

We find that the above facts have given rise to a peculiar situation in the impugned AY where the assessee, although has earned capital gains, but no credit is there in the Profit & Loss Account which is only due to the provisions of Section 45(2).

We also find that, whatever accounting methodology has been adopted by the assessee to record the above transactions in the books of accounts, they are in consonance with the requirements of Schedule VI of the Companies Act and the Ld. AO, as per the decision of Hon’ble Supreme Court in Apollo Tyres Ltd. Vs. CIT [supra] could not tinker with the profits shown by the assessee as per the Companies Act. In the said judgment, the Apex court clearly held that the Assessing Officer has to accept the authenticity of the accounts maintained in accordance with the provisions of Companies Act, 1956 which are duly audited and ski invasrocture Lined passed in general body meeting of shareholders. It was also held that the Assessing Officer has no power to disturb the profits in the Profit & Loss Account except to the extent provided in explanation to Section 115J. To put it differently, the assessing officer does not have the jurisdiction to go beyond the net profit shown in the Profit & Loss Account except to the extent provided in the Explanation to Section 115J and therefore, the AO has to accept the profit as per the profit & loss account prepared in accordance with the companies act and thereafter he can proceed to make the additions and deletions set out in the explanation to Sec 115J of the act. He cannot make any adjustment which is not permitted under explanation to Sec 115J of the Act. The interpretation as above by the Apex court will equally apply to 115JB as those provisions are identical to provisions of Sec 115J with certain variations which does not in any way alter the starting point of computation of book profit u/s 115J of the act. It is also well settled that the MAT provisions are a complete code in itself and deeming fiction to be construed strictly and therefore, whatever computations are to be made, they are to be made strictly in accordance with the provisions provided in the code itself.

Therefore, on the facts and circumstances, we find that Ld. CIT(A) clinched the issue in the proper perspective and provided relief to the assessee in accordance with the law. This being so, we find no reason to interfere with the same and no hesitation in dismissing revenue’s appeal. Both the adjustments of ‘Capital Gains’ and ‘Business Loss’ done in the computation of MAT profits u/s 115JB stands deleted. The Ld. AO is Skil Infrastructure Limited directed to re-compute Book Profit u/s 115JB in terms of our above order.

In nutshell, the revenue’s appeal stands dismissed.