ITAT, Mumbai: Book Profit u/s 115JB includes amount of loan waived off

Duke Offshore Ltd. v. Dy. CIT decided on 5^th January, 2011

Question before the Tribunal: Whether in the course of settlement under OTS with a bank, the reduction of liability to Bank credited to the P&L account should be taken into account in computing Book Profits u/s 115JB, particularly when part of the same represents waiver of principal portion of loan?

Relevant facts: “The Assessee had an OTS with GTBank as a result of which there was a waiver/ reduction of the liability to bank to the extent of Rs. 44,513,406. This was shown as an extraordinary item, `below the Line’. The Assessee took the P&L figure of Rs. 1,08,48,955/- appearing before the extraordinary items and offered it as book profits and contended that the extraordinary item of Rs. 44,513,406/- cannot be added in computing the Book profits. The AO on the other hand took P&L as Rs. 54,168,537/- appearing after the extraordinary items and appropriations as the starting point for computation of Book Profits u/s 115JB and held that the extraordinary item of Rs. 44,513,406/- cannot be reduced in computing the Book profits.”

Dismissing the appeal of the assessee, it was held, inter-alia that:

1. (Para 8): “From the above, it is very clear that the net profit figure to be taken is only after the appropriation ie, below the line. Otherwise, adding to / reducing from the book profits the appropriations like amount carried to reserve, amount withdrawn form the reserve, the provisions made for diminution in value of assets, provisions for meeting liability etc. as per the explanations become unworkable. Therefore the language of Section 115JB is very clear to indicate that starting point of the profit and loss should be the figure after the appropriation as well as any extraordinary item made or prior year expenses which the company may for the purpose presentation show `below the line’. Therefore amounts credited or debited to the P&L account below line cannot be ignored.”

2. (Para 13): “Computation of book profit is a separate code itself and determination has to be made on the basis of profit computed in the Companies Act and in accordance with the various Accounting Standard and guideline issued in this regard. What is capital or revenue for the purpose of computation of taxable income under the normal provisions may not be the capital or revenue while computing book profit… As pointed out earlier, any receipt even if it is a capital receipt, which may or may not be taxable under the normal provisions of the Income tax Act, if it is credited to the profit and loss account cannot be excluded in computing the book profit, unless it is specifically excluded under any of the Explanations found in that section.”

The judgment is available here.