IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE T.R.RAMACHANDRAN NAIR WEDNESDAY, THE 20TH FEBRUARY 2008 / 1ST PHALGUNA 1929 ITA.No. 79 of 2002() -------------------- ITA.118/COCH/1997 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT:- --------------------------------------- M/S. N.J.JOSE & CO. (P) LTD., ERANHIPALAM, CALICUT. BY ADV. SRI.P.BALACHANDRAN SMT.PREETHA S.NAIR RESPONDENTS: APPELLANT:- ------------------------------------------ 1. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE II, DIVISION II, CALICUT. 2. THE COMMISSIONER OF INCOME TAX, CALICUT. BY ADV. SRI.P.K.R.MENON(SR.),SC FOR IT FOR R SRI.GEORGE K. GEORGE, SC FOR IT FOR R THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 20/02/2008, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.N. Ramachandran Nair & T.R. Ramachandran Nair, JJ. - - - - - - - - - - - - - - - - - - - - - - - - I.T.A.NO.79 of 2002 - - - - -- - - - - - - - - - - - - - - - - - - - - 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 ITA 79/2002 -2- 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 ITA 79/2002 -3- 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 ITA 79/2002 -4- 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 ITA 79/2002 -5- 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. - - - - - - - - - - - - - - - - - - - - - - I.T.A.No.79 of 2002. - - - - - - - - - - - - - - - - - - - - - - JUDGMENT 20th February, 2008.