ITO 5(2) (2), MUMBAI vs. JDV AUTOMOTIVE ENGG. P. LTD, MUMBAI

O R D E R PER SANDEEP GOSAIN, JM: The present appeal has been filed by the Revenue against the order dated 02.01.2014 passed by CIT(A)-9, Mumbai thereby partly allowing the appeal of the assessee against the order of assessment dated 03.01.2013 made by Assessing Officer (AO) u/s 143(3) of the Income-tax Act (for short the “Act”) 1961. The following grounds of appeal are raised in the appeal.

1. "Whether on the facts and in the circumstances of the case and in law, the Ld. C1T(A) has erred in deleting the addition of Rs.1,62,39,644/- i.e. profit of sale of Modi Chambers, made to me book profit u/s.115JB?"

2. "Whether on the facts and in the circumstances of the case and in law, the Ld. C1T(A) has failed to appreciate the fact that for the purpose of section 115JB the company assessee should prepare its profit and loss account in accordance with the provisions of Part 11 of Schedule VI to the Companies Act,1956?"

3. The appellant prays that the order of the Ld. CIT(A) be set aside and the order of the AO be restored. 4. The appellant craves leave to amend or alter any ground or add any other grounds which may be necessary. 2. The brief facts of the case are that the return of income declaring total loss of Rs. 3,22,225/- was e-filed on 29.09.2010 and processed u/s 143(1) of the Act. The case was selected for scrutiny and accordingly after serving the statutory notices, the order of assessment was made by AO vide its order dated 03.01.2013.

3. Aggrieved by the order of AO, the assessee filed an appeal before the CIT(A) and the CIT(A) deleted the addition of Rs. 1,62,39,644/- i.e. profit on sale of Modi Chambers made to the book profit u/s 115JB of the Act and partly accepting the appeal vide its order dated 02.01.2014.

4. Aggrieved by the order of CIT(A), the Revenue filed the present appeal before us on the grounds reproduced here in above.

Ground No.1 to 4 taken by Revenue are interrelated. Therefore, they are being disposed of collectively by this order.

Since the profit has not been routed through P&L A/c and thereby not considered for book profit u/s 115JB of the Act, which says that the mandate of accounting standard, the profit arising on sale of Modi Chambers amounting to Rs. 1,62,39,644/- should have been routed through P&L A/c and since the assessee failed to adhere the accounting standard, therefore, the addition were rightly made u/s 115JB(2) of the Act which reads as under:

“.........Every assessee, being a company, shall for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956(1 of 1956).........” and since the assessee failed to compute book profit u/s 115Jb of the Act in the manner prescribed, therefore, the addition were rightly made by the AO and therefore, the same may be sustained, on the other hand ld. Authorised Representative (AR) representing the assessee has relied upon the order passed CIT(A) and submitted that the addition of Rs. 1,62,39,644/- i.e. profit on sale of Modi Chambers which is added to the book profit u/s 115JB of the Act, it was noticed that the AO made this addition only on the ground that the assessee has not routed this profit through its P&L A/c which was required as per accounting standard whereas infact the assessee during the order under consideration has invested the entire sale proceedings of the sold asset i.e. Office Premises in the acquisition of new immovable property which is reflected fixed asset schedule prepared in accordance with the schedule of the Companies Act and therefore, the CIT(A) had rightly deleted the additions made by AO. The AR further relied upon the written submissions submitted before the CIT(A) which reads as under:

“The Profit and Loss Account and Balance Sheet of the assessee company have been prepared in accordance with the provisions of Schedule VI of the Companies Act and sound and accepted principles of accounting practice. During the year under consideration the assessee company had sold immovable property (office premises) of the company and had purchased another immovable property out of the sale proceeds. The entire sales proceeds was invested in the acquisition of new immovable property as can be seen from the fixed assets schedule prepared in accordance with the Schedule VI of the Companies Act (Refer page No. 28 of paper book). The entire profit on sale of office premises is a capital receipt and has been credited to the capital reserve account in the Balance Sheet as the profit is not part of the distributable income of the assessee company. This is more so because the sales proceeds have been re-invested in another fixed asset and the same is not available for distribution as profits. Hence according to the correct accounting principles the capital gain on sale of office premises has been credited to Capital Reserve Account in the Balance Sheet. Book profit means normal business profit and profit on sale of fixed asset is not normal book profit particularly when the same is invested in immovable property and is not available for distribution as dividend. The Financial Statements have been prepared in according to the Companies Act and the same have been audited by Chartered Accountant and accepted by the shareholders and also by the Registrar of the Companies. Hence after considering the adjustments allowed by the Explanation 1 to section 115JB, the book profits is a negative figure and hence there is no MA T. The computation of book profit for the purpose of MAT is as under: Net Profit as per Profit and Loss A/c Rs. 1,05,96,585 Less : Dividend income exempt u/s 10 Rs. 1,09,22,400 Book Profit (-) Rs. 3,25,815 ============= Since book profit is a negative figure the MAY payable is Rs. NIL. The Assessing Officer has added the amount of capital reserve to the profit as per Profit and Loss Account which is not permissible as per provisions of section 115JB and after deducting dividend income has computed the book profit for the purposes of levy of MAT at Rs. 1,59,13,8291- (Refer page 5 of assessment order). It has been held by the Appellate Authorities that the Assessing Officer while computing the book profits has only the power of examining whether the books of accounts are certified by the Chartered Account as being properly maintained in accordance with the sound accounting principles. Once the Chartered Account certifies the same and the shareholders approve the accounts in the AGM and the Registrar of Companies accepts the same, the Assessing Officer has only the limited power to making increases and reductions as provided for in the provisions of section 115JB. The Assessing Officer cannot add the capital gains credited to the Capital Reserve to the profits as shown in the Profit and Loss Account. The entire issue has been discussed thoroughly in the following cases by the Supreme Court and the Hon. ITAT, Mumbai. The copies of the appellate orders are on page Nos. 38 to 82 of the paper book.

ITO 6(3)(1) v. M/s. Galaxy Saws P. Ltd (ITA No. 37471MI2009 -ITAT, G- Bench, Mumbai) ITO 6(3)(1) v. M/s. Galaxy Knives P. Ltd (ITA No. 71251Muml2008 - ITAT, G- Bench, Mumbai) Apollo Tyres Ltd. v. CIT (and vice verse) - 2551TR 273 (Supreme Court) Malayala Monorama Co. Ltd. v. CIT – 300 ITR 251 (Supreme Court)

We are of the considered view that the CIT(A) has rightly dealt with the above grounds and rightly held that in the present case there is no taxable income in the form of capital gains in the hands of the assessee because the sale proceedings of fixed asset has been invested into another fixed asset of the same nature i.e. immovable property during the year under consideration and the same is reflected in the fixed assets schedule prepared in accordance with Schedule 6 of the companies Act. Since the addition to the specific block of asset of the property was more than the reduction in the block of assets, there is no case of capital gains as per the provisions of section 50 of the Act. We also respectfully following the judgments cited by AR namely ITO vs. M/s Galaxy Saws P. Ltd. (ITA No. 3747/M/2009), ITO vs. M/s Galaxy Knives P. Ltd. (ITA No. 7125/M/2008) and Apollo Tyres Ltd. vs. CIT (and vice versa) – 255 ITR 273 (SC). Therefore, considering the aforementioned facts, no interference is required in the orders passed by CIT(A), therefore, the order passed by the CIT(A) is upheld and the appeal filed by the Revenue is dismissed.

Order pronounced in the open court on this 3rd day of February, 2016.