Capital profits from asset sales must be routed through P&L account for Section 115JB computation.

The Appellant, a private limited company engaged in leasing and renting buildings, declared a loss for the Assessment Year 2010-2011

During this period, the Appellant sold two fixed assets (properties at Vadapalani and Harrington Road), realizing a capital profit of approximately ₹32.11 Crores

The Appellant credited this profit directly to the "Reserves Surplus" in its Balance Sheet instead of routing it through the Profit and Loss (PL) Account

The Statutory Auditor noted this as a deviation from accounting policy that understated the year's profit

The Assessing Officer (AO) reworked the "book profits" under Section 115JB of the Income Tax Act, 1961, by including the capital gains in the PL Account, resulting in a tax demand

This order was concurrently upheld by the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT)

1. Whether the capital profit on the sale of fixed assets can be taken directly to the Reserves Surplus in the Balance Sheet or must be routed through the Profit Loss Account to arrive at the correct "book profits" under Section 115JB of the Income Tax Act

2. Whether the Appellate Tribunal was right in law in reworking the profits under Section 115JB by treating the profit on the sale of fixed assets as normal profit for the purpose of calculating Minimum Alternate Tax (MAT)

Section 115JB of the Income Tax Act, 1961, which mandates that companies must prepare their PL accounts in accordance with Parts II and III of Schedule VI to the Companies Act, 1956

Principle established in Dynamic Orthopaedics (P) Ltd. v. Commissioner of Income Tax (2010), which held that Section 115J (and by extension 115JB) creates a deeming fiction requiring strict adherence to Schedule VI of the Companies Act to prevent "zero tax" companies from understating profits

Clause xi(a) of Part II, Schedule VI of the Companies Act mandates disclosure of income from investments and material non-recurring transactions

The Court observed that for the purpose of computing "book profits" under the MAT regime, a company is legally obligated to prepare its PL account as per the requirements of the Companies Act

The Appellant’s contention that sale proceeds of fixed assets are purely capital and need not touch the PL account was rejected

The Court emphasized that Schedule VI, Part II of the Companies Act requires the disclosure of all material features, including receipts from non-recurring or exceptional transactions

The Statutory Auditor’s report specifically highlighted that bypassing the PL account resulted in an understatement of profit by ₹26.82 Crores, which the Court viewed as a deliberate deviation from mandated Accounting Standards (AS 10)

Relying on the Dynamic Orthopaedics precedent, the Court held that the deeming fiction of Section 115JB does not allow for a liberal interpretation that would permit excluding asset-sale gains from the computation of net profit

It held that capital profits from the sale of fixed assets must be routed through the PL Account to arrive at the correct "book profits" under Section 115JB

Consequently, the AO was justified in reworking the profits to include the ₹34,11,86,517 realized from property sales

The Tax Case Appeal was dismissed, and the orders of the ITAT and lower authorities were confirmed