Saturday, August 14, 2010


The assessee credited its P&L A/c with an amount of Rs. 149.77 crores being the profit on sale of assets to its wholly owned subsidiary. As the said profits were not chargeable to tax u/s 47(iv), the assessee took the view that the same had also to be reduced from the "book profits" u/s 115JB.

  • The AO can alter the "book profit" only in two circumstances (a) if the P&L A/c is not drawn up in accordance with Parts II & III of Schedule VI to the Companies Act or (b) If accounting policies & standards, method & rate of depreciation have been incorrectly adopted for preparation of the P & L A/c.
  • Parts II & III of Schedule VI to the Companies Act do not permit the exclusion of capital gain from the P & L A/c.

The fact that the capital gains was exempt u/s 47(iv) does not mean it can be excluded from the "book profit" because no such exclusion was permitted under the Explanation to sec 115JB. Note: Though the Special Bench observed that it was not necessary for it to dwell upon a situation where the assessee has directly credited the profit on sale of asset to a reserve Account, it referred with approval
to Bombay Diamond Co 33 DTR 59 where even profits not credited to the P&L A/c were held includible in Book Profits. Growth Avenue approved. Sutlej Cotton Mills 45 ITD 22 (Cal) (SB) which held that exempt capital gains had to be reduced from book profits was held not to be good law.


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