OSWAL AGRO MILLS LTD Vs. DEPUTY COMMISSIONER OF INCOME TAX
LAWS(IT)-1994-9-20
INCOME TAX APPELLATE TRIBUNAL
Decided on September 22,1994

Appellant
VERSUS
Respondents

JUDGEMENT

R.M. Mehta, Accountant Member - (1.) 1 to 34 [These paras are not reproduced here as they involve minor issues.] 35. We now come to the various grounds raised by the assessee with reference to the computation of "book profit" under Section 115J. It would not be out of context to state that these grounds were vehemently argued by both the sides with reference to the relevant provisions of law, the facts on record and the decision cited at the bar by both of them. 36. The first issue pertains to the deduction on account of depreciation in working out the book profit. The assessee-company determined the book profit at a loss of Rs. 6,11,56,136 by charging depreciation of Rs. 46,42,18,709 which had been worked out under Section 32 of the Income-tax Act. The books of accounts however, revealed a profit of Rs. 34,00,83,889 after depreciation had been deducted in accordance with the "straight-line method". To appreciate the controversy in better perspective, it would be necessary to reproduce the following figures appearing in the order of the Assessing Officer and thereafter taken note of by the Commissioner of Income-tax (Appeals) : JUDGEMENT_2686_TLIT0_19940.htm 37. An examination of the aforesaid chart revealed that the assessee had provided depreciation as on 31-3-1990 at a figure of Rs. 46.82 crores by passing a journal entry in the books of account for the accounting period ending 30th June, 1990, but the said entry was reversed at the time of closing of the books on 30th June, 1990. It was further found that depreciation as on 30th June, 1990 was provided in the books of account on the method followed in the past viz., "straight-line" at a figure of Rs. 9.08 crores. The Assessing Officer further found that the depreciation of Rs. 46.82 crores had no relation with the actual figures recorded in the books of account vis-a-vis the written down value of the opening as well as closing assets. It was further found that as on 30th June, 1990 the assessee had declared a profit of Rs. 41.82 crores and made a provision for dividend to the tune of Rs. 35.85 crores. As against the aforesaid figure, the assessee had determined a loss of Rs. 6.11 crores for the purposes of Section 115J of the Income-tax Act. 38. The aforesaid facts and figures led the Assessing Officer to further go into the relevant provisions of the law with reference to the avowed object behind the insertion of Section 115J and the intention to levy some sort of a tax on the so-called highly profitable, but "zero tax" companies. According to him, the basis of charge put forth by the assessee sought to defeat the object behind the insertion of the section itself. 39. On being asked to explain the claim for depreciation with reference to the provisions of law, the assessee stated that as long as the profit and loss account for purposes of the computation under Section 115J was in the format laid out in Part II and Part III of Schedule VI of the Companies Act, the Assessing Officer had no power to disturb the same. It was the further submission that under the said section the assessee could prepare a profit and loss account which could even be a deviation from the principles and practices being followed on the basis of which the books of account were being maintained. The aforesaid submissions did not find favour with the Assessing Officer, who rejected them on the following main grounds : (i) That Section 115J had been introduced as an alternative to Section 80WA as the latter section had failed to achieve its objects. That the revocation of Section 80WA took place simultaneously with the introduction of Section 115J; (ii) That the legislative intention behind the introduction of the section was made clear by the speech of the Hon'ble Finance Minister which referred to the need for subjecting to tax the highly profitable "zero tax" companies which reduced their tax liability to zero by availing of tax incentives and concessions available under various provisions of the Income-tax Act; (iii) The intention behind Section 115J was to tax corporate bodies on the basis of profits declared by them in their own accounts and which meant the profit and loss account prepared with reference to the entries in the books of account being maintained on accountancy principles and past practice; (iv) That the term "book profit" re-affirmed that the said profit should have its roots in the assessee's books of account; (v) That depreciation to be charged was to be in accordance with the method being consistently followed once again with reference to the books of account; (vi) That the profit and loss account prepared by the assessee if not in conformity with the books of account or in accordance with Parts II and III of Schedule VI; the Assessing Officer had the power to reject the same and re-compute the "book profit"; (vii) That Section 205 of the Companies Act stipulated the various standard methods of charging depreciation, but nowhere had any option been given to the Directors of the company to pick and choose as they liked since the method once adopted was required to be followed regularly as even required by the principles of accountancy. That the company could switch over to a different method if the Directors felt that the method followed till that point of time was required to be abandoned in favour of another method as the latter method was more appropriate to reflect the true measure of the depreciation which the fixed assets would suffer on account of wear and tear or obsolescence; (viii) That the assessee in the present case had not changed its method of charging depreciation in the books of account and had consistently followed the "straight-line" method even subsequently; (ix) That there was a conceptual difference vis-a-vis the basis for charging depreciation in the books of account and the depreciation allowable under the Income-tax Act prior to 1-4-1988 and after that date. That prior to 1-4-1988 the depreciation allowance under Section 32(1) was essentially nothing, but a measure to compensate diminution in the value of fixed assets on account of wear and tear by way of allowance whereas after 1-4-1988 the concept underwent a total transformation being no longer related to diminution in the value of fixed assets on account of wear and tear. That prior to 1-4-1988 Sections 205 and 350 of the Companies Act also considered depreciation with reference to the corresponding provisions of the Income-tax Act, but taking note of the change brought about in the Income-tax enactment after 1-4-1988 the Parliament made amendments to the Companies Act by de-linking depreciation under the said Act from the concept of depreciation admissible under the Income-tax Act; (x) That the Tribunal in assessment year 1989-90 had taken note of the amendment to Section 205 of the Companies Act and restored the matter back to the Assessing Officer asking him to decide the issue in the light of the amendment. That the amendment settled the issue in favour of the revenue and the assessee was not justified in claiming depreciation as per the basis and manner laid down under the Income-tax Act since this was no more an acceptable method under Section 205 of the Companies Act; (xi) That the method prescribed under the Income-tax Act for charging depreciation was not in harmony with the methods prescribed under Section 205 of the Companies Act for the reason that under the former enactment depreciation allowance was given on the WDV of the block of assets whereas under the latter enactment the charge of depreciation was in respect of each and every depreciable asset. This further supported the case of the Department that the method prescribed under the Income-tax Act could not be considered valid for charging depreciation under the Companies Act; and (xii) That a simultaneous amendment was carried out in respect of Section 350 of the Companies Act by the introduction of Schedule XTV prescribing rates of depreciation for various categories of assets both on straight-line method and WDV method. 40. In view of the aforesaid the Assessing Officer considered the provision for depreciation to the extent of Rs. 6.11 crores as a valid charge against "book profits" and treated the balance viz., Rs. 40.71 crores as a reserve. The latter figure was included as a part of the "book profit" in view of Clause (b) of Explanation to Section 115J(1A). The "book profit" of the assessee for purposes of Section 115J was computed at a figure of Rs. 34,00,83,889 and income at 30 per cent thereof was calculated at Rs. 10,20,24,930. 41. Being aggrieved with the view taken by the Assessing Officer the assessee came up in appeal before the Commissioner of Income-tax (Appeals). At this stage detailed written submissions were filed and which have been reproduced verbatim in the order of the first appellate authority from pages 12 to 39. For purposes of disposing of the present appeal, we summarise herewith the following main submissions on the part of the assessee : (1) That a reading of the relevant provisions of law would clearly show that the profit and loss account prepared by the assessee-company for the purposes of Section 115J being in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act was required to be accepted for purposes of working out the "book profit". In other words, the said profit and loss account was sacrosanct; (2) That all that the section required was that the companies would prepare the profit and loss account in accordance with Parts II and III of Schedule VI and the section nowhere empowered the Assessing Officer to prepare his own profit and loss account and substitute it for the one prepared by the assessee; (3) That preparation of profit and loss account for purposes of Section 115J was a "technical matter" governed by the Companies Act, which Act was "foreign" to the Assessing Officer. That the Assessing Officer was not an authority under the Companies Act and hence he could not assume any jurisdiction to question the basis on which the profit and loss account had been prepared; (4) That the power of the Assessing Officer was restricted to the examination of the adjustments carried out to the profit and loss account in arriving at the figure of "book profit" and he had no choice, but to accept the computation of "book profit" as prepared by the assessee with reference to the relevant provisions of the Companies Act; (5) A comparative reading of the provisions of Section 143(3) and Section 115J of the Act clearly brought out the difference in the powers of the Assessing Officer and whereas under the former section the Assessing Officer could make detailed enquiries and adjust and re-adjust the returned figure no such thing could be done in respect of the latter section and the Assessing Officer had to restrict himself to comparing "30 per cent of the book profit and substituting the figure of 30 per cent of the book profit in the event of it being greater than the income determined by him in writing under Section 143(3) of the Act"; (6) That the profit and loss account prepared by the company for purposes of Section 115J was in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act, it was duly audited and tax audit report prescribed under Section 44AB filed along with the said audited accounts. The accounts of the company had further been audited under the Companies Act and the audit report under the same Act had also been attached along with the profit and loss account and tax audit report. The profit and loss account had been prepared in accordance with the provisions of Schedule VI and even during the course of the assessment proceedings the Assessing Officer had not pointed out any defect; (7) That although the income to be computed under Section 115J was a notional income and not a real income it was still an income to be computed under the Income-tax Act. That even after the amendment of the Companies Act in 1988 vis-a-vis the provision relating to depreciation the same had to be allowed as per the rates prescribed under the Income-tax Act and Rules while computing the total income of the assessee. Further as far as the Income-tax Act was concerned, whether it was a normal assessment or the working out of the income under Section 115J the depreciation had to be allowed as per the Income-tax Act and not that prescribed under the Companies Act; (8) That it was an established rule of interpretation that the provisions of an Act were required to be interpreted independently of the provisions of any other Act and both the Income-tax Act and the Companies Act were such independent enactments and there being no basis to import the provisions of one into the other; (9) That it was not correct on the part of the Assessing Officer to hold that the rates of depreciation prescribed in Schedule XIV to the Companies Act were to be adhered to for providing depreciation in the profit and loss account prepared for the previous year under consideration in terms of Section 115J(1A). This submission was made with reference to the said rates having been adopted by the assessee while preparing the profit and loss account for the period ending 30th June, 1989 and 30th June, 1990; (10) That the intention of introducing Section 115J was not with reference to depreciation, but related to allowances, concessions and incentives and depreciation being neither of these. That depreciation was a charge against the income of a company and necessarily had to be allowed with reference to the provisions of the Income-tax Act; (11) That with effect from 1-4-1988 there came about a conceptual change in the provisions pertaining to depreciation as the concept of "block of assets" came to be introduced and the Assessing Officer was obliged to allow depreciation while computing the total income under the Income-tax Act on the block of assets owned by the assessee even though the assessee may not have claimed the same in the accounts or made any provision thereof. That the rates of depreciation given under the Income-tax Act were valid and there was no justification on the part of the Assessing Officer to reject these rates in preference to those prescribed under the Companies Act; (12) That Section 115J was a charging section, exhaustive and a "mini code" in itself and had nothing to do with the provisions of the Companies Act vis-a-vis the claim for depreciation while computing the deemed income under the said section. In other words, the provisions of the Companies Act were not at all applicable; (13) That in the profit and loss account which had been prepared under the Companies Act the assessee had provided depreciation at the rates prescribed in Schedule XIV and this was in conformity with the provisions of Section 205(2) for the purposes of declaring dividend and not for any other purpose. However, for purposes of Section 115J a profit and loss account for the period ending 31st March, 1990 had been prepared and depreciation charged there-under was the one pertaining to the provisions of the Income-tax Act; (14) That the assessee could claim depreciation even without passing any entries in the books of account and the view canvassed thereafter being that in case the assessee had made a short provision in respect of depreciation in the profit and loss account it could still claim depreciation at the higher rates envisaged under the Income-tax Act for computing its total income; (15) That the concept of "book profit" had to be understood with reference to the figure worked out after taking into account the depreciation admissible under the Income-tax Act; (16) That Section 115J was a non obstante section and no other provisions of the Income-tax Act were applicable to it. Further it was not a real income which was sought to be taxed under the said section, but a notional income and that being 30 per cent of the book profit. That the term "book profit" meant the profit and loss account for the relevant previous year prepared under Sub-section (1A) of Section 115J which was sacrosanct and mandatorily required to be accepted by the Assessing Officer. That it was otherwise normal to have a different profit and loss account from the same set of figures one for purposes of declaring dividend, another for computing Directors' remuneration and thirdly, for purposes of computing the book profit under Section 115J. All that the law stipulated was that the profit and loss account was in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act; (17) That the Assessing Officer had not pointed out any non-compliance on the part of the assessee vis-a-vis the provisions of Parts II and III of Schedule VI to the Companies Act and the dispute with respect to depreciation had been created as a result of some "confusion" on the part of the Assessing Officer because he had travelled beyond his jurisdiction and proceeded to compare the profit and loss account prepared under the Companies Act for purposes of declaring dividend with the one prepared for purposes of Section 115J; (18) That the rates under the Income-tax Act were higher than those prescribed in Schedule XIV to the Companies Act, the purpose of the separate profit and loss account prepared being entirely different. That the one prepared for the shareholders disclosed more profits so that a higher amount of dividend could be declared whereas the one prepared for purposes of Section 115J and which provided depreciation under the Income-tax Act reflected lower figure so that "minimum amount of deemed income" be worked out; (19) That Parts II and III of Schedule VI to the Companies Act nowhere prescribed the rates at which depreciation was to be provided and the matter had been left to the discretion of the Board of Directors to provide appropriate amount in respect of each asset. That the only requirement was to show the depreciation provided and if not provided to give a note indicating the arrears of depreciation; (20) That the rates of depreciation stipulated under the Income-tax Act could not be rejected as these were based on "certain scientific formulae" and had been used for the purposes of Companies Act up to 1988 and it was only thereafter that an attempt was made to delink the Income-tax rates and bring on the statute Schedule XIV which provided depreciation rates under the Companies Act. That before 1988, the Income-tax rates were also being followed for purposes of the Companies Act. Further Schedule XIV to the Companies Act was relevant for Sections 205, 349 and 350 of the Companies Act and not relevant for purposes of Parts II and III of Schedule VI to the Companies Act; (21) That even for purposes of Sections 205, 349 and 350 for which Schedule XIV was relevant the rates of depreciation other than those prescribed in the said Schedule could be charged and that the said view had been accepted by the Department of Company Affairs and the Institute of Chartered Accountants of India (Circular No. 2 of 1989 dated 7-3-1989 issued by the Department of Company Affairs referred to); and (22) That there was no justification on the part of the Assessing Officer to compute assessee's income under Section 143(3) by allowing deduction in respect of depreciation at the rates stipulated under the Income-tax Act and in the same assessment order while working out the "book profit" under Section 115J the said figure of depreciation already allowed was substituted for a lower figure prescribed in Schedule XIV to the Companies Act. 42. In addition to the aforesaid submissions the learned counsel appearing before the Commissioner of Income-tax (Appeals) also referred to the background leading to the introduction of Section 115J on the statute book vis-avis the speech of the Hon'ble Finance Minister and also placed reliance on a string of decisions in support of the aforesaid arguments. In concluding it was urged that Section 115J was a charging section and its interpretation was to be in accordance with the words used in the said section and not with reference to its intent. It was also urged that it was a non obstante section to which none of the other provisions of the Income-tax Act and more so the Companies Act applied. 43. The Assessing Officer who chose to be present at the time of the hearing of appeal by the Commissioner of Income-tax (Appeals) argued revenue's case by vehemently supporting the assessment order. His main submissions can be highlighted as under:- (i) That the provisions of Section 115J were closely linked with the provisions of Section 205 of the Companies Act and the assessee was required to prepare a profit and loss account in accordance with the provisions of Parts II and III of Schedule VI to the latter Act; (ii) Circular No. 2 dated 7-3-1989 issued by the Department of Company Affairs categorically stated that an assessee could claim higher depreciation not as per Income-tax Rules, but according to the report of a technological expert and in the assessee's case no such report had been obtained; and (iii) That the decision of 'A'-Bench of the Tribunal in the case of Modern Woollens Ltd. v. Dy. CIT [1993] 47 ITD 154 (Bom.) did not consider the aforesaid circular and further in that case, the assessee had changed the method of charging depreciation and followed the same in the subsequent assessment years as well whereas in the present assessee's case the depreciation had been charged in the books of account as on 30th June, 1989 and 30th June, 1990 as per Schedule XIV of the Companies Act, but on the intervening date viz., 31st March, 1990 the same had been charged as per Income-tax Rules for working out the "book profit" under Section 115J. 44. The Commissioner of Income-tax (Appeals) considered the rival submissions with reference to the relevant provisions of law both under the Income-tax Act and the Companies Act and discussed at some length the background leading to the insertion of Section 115J of the Income-tax Act. The main observations and views expressed by the first appellate authority can be summarised as under:- (i) That "book profit" for purposes of Section 115J was closely linked with the provisions of Section 205 of the Companies Act, 1956 and this being further clarified by "Departmental Circular No. 495 dated 22-9-1987". Further the Explanation to Sub-section(1) of Section 115J gave the definition of "book profit" by incorporating the requirements of Section 205 of the Companies Act. That for computing "book profit" under Section 115J a company was required to prepare its profit and loss account in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act read with the requirements of Section 205 of the said Companies Act; (ii) As per provisions of Section 211(2) of the Companies Act, every profit and loss account of a company was required to give a true and fair view of the profit or loss of the company for the financial year in accordance with the requirements of Part II of Schedule VI which required disclosure in respect of the amount for depreciation, renewals or diminution in the value of fixed assets. If provision was made the method was required to be disclosed and if no provision was made then the fact that no provision had been made was required to be indicated along with the quantum of arrears of depreciation in accordance with Section 205(2). In other words, depreciation was required to be charged in accordance with the said section only; (iii) Before the amendment of Section 205(2)(d) a company was entitled to claim depreciation as per the Income-tax Act, 1922 or the rules framed thereunder, but when it was found that the depreciation admissible under the Income-tax Act was not real, but liberal and the profit and loss account prepared after claiming depreciation under the Income-tax Act would not depict "a true and fair view of the profit and loss of the company", the Parliament amended the Companies Act in 1988 by inserting Schedule XIV with retrospective effect from 2-4-1987. That as per the intent and purpose of the amendment depreciation under the Income-tax Act was completely delinked and a company was required to provide for depreciation as per the rate specified in Rule XIV; (iv) That Circular No. 2 dated 7-3-1989 issued by Department of Company Affairs further clarified that if a higher rate of depreciation was justified on the basis "of a bona fide technological evaluation" then the same could be provided with a proper disclosure in the accounts. That the rate of depreciation under the Income-tax Rules as per appendix 1 inserted with effect from 2-4-1987 was not based on any bona fide technological evaluation and as indicated by the Hon'ble Finance Minister in his speech it was a liberal rate of depreciation. To sum up a company could not claim depreciation as per Income-tax Rules for preparing its profit and loss account under the Companies Act; and (v) The Department of Company Affairs was not unaware of the rates of depreciation under the Income-tax Rules and if there was any intention on its part to allow depreciation as per Income-tax Rules it could very well have been stated in the circular of 1989 that such higher rate could be claimed. 45. In the final analysis, the Commissioner of Income-tax (Appeals) rejected the arguments advanced on behalf of the assessee and upheld the view taken by the Assessing Officer in computing the "book profit" at a figure of Rs. 34,00,83,889 and income under Section 115J at Rs. 10,20,24,930 being 30 per cent thereof. According to him, the assessee could charge depreciation either as per Schedule XIV of the Companies Act or at a higher rate on the basis of a report of a technological expert, but under no circumstances could it claim the same as per the rates prescribed in the Income-tax Rules. The profit and loss account, according to him, had not been prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act. 46. We have heard both the parties at considerable length vis-a-vis the question of depreciation in computing the book profit under Section 115J. We do not propose to set out the arguments advanced by both the parties as these are quite identical to those raised and considered at the first appellate stage. The learned counsel invited our attention to the relevant provisions of the Income-tax Act as also the Companies Act reiterating as he did before the Commissioner of Income-tax (Appeals) that depreciation as claimed and allowed in computing taxable income/loss under Section 143(3) was a valid charge even for computing the book profits under Section 115J. The submissions of the learned Departmental Representative, on the other hand, were that the proposition Jaid out by the assessee's counsel did not emerge from any provision either of the Income-tax Act or the Companies Act and especially when there was a direct reference to provisions of the Companies Act in Section 115J itself. For the proposition that both the Acts were inter-linked and required to be read together the Departmental Representative placed reliance on the decision of the Hon'ble Andhra Pradesh High Court in the case of V.V. Trans Investments (P.) Ltd. v. CIT [1994] 207 ITR 508. The further submission on his part was that in case depreciation as per computation under Section 143(3) was to be allowed even for purposes of Section 115J then reference to provisions of the Companies Act in Section 115J could have been avoided altogether. The learned Departmental Representative further stated that the assessee-company although returning huge losses in 143(3) computation had in fact declared substantial dividend and had also made a public issue of shares subsequently. According to him this was in fact the best example of a company which squarely fell for consideration under Section 115J. He in fact went on to describe it as a "Blue-chip company". He concluded his arguments by urging that the decision of the Commissioner of Income-tax (Appeals) be upheld. 47. Before we proceed to give our decision on the arguments advanced by both the parties we would like to mention that the assessee's counsel reiterated reliance on the decisions cited before the Commissioner of Income-tax (Appeals) and required us to look into the following further judgments:- (i) CIT v. Kanan Devan Hills Produce Co. Ltd. [1979] 119 ITR 431 (Cal.); (ii) CIT v. Buhari Sons (P.) Ltd. [1983] 144 ITR 12 (Mad.); (iii) Mittal Ice and Cold Storage v. CIT [1986] 159 ITR 18 (MP); (iv) CIT v. asan Publications (P.) Ltd. [1986] 159 ITR 381 (Mad.); (v) Smt. Sunanda Devi Singhania v. CWT [1993] 204 ITR 842 (Cal.); (vi) Sutlej Cotton Mills Ltd. v. Asstt. CIT [1993] 199 ITR 164 (Cal.-Trib.) (SB); (vii) Apollo Types Ltd. v. Dy. CIT [1992] 43 ITD 464 (Coch.); (viii) Modern Woollens Ltd.'s case (supra); (ix) SRF Ltd. v. Asstt. CIT [1993] 47 ITD 504 (Delhi); (x) Govind Saran Ganga Saran v. CST [1985] 155 ITR 144 (SC); (xi) Anandji Haridas and Co. (P.) Ltd. v. Engg. Mazdoor Sangh [1975] 99 ITR 592 (SC); (xii) Col. H.H. Sir Harinder Singh v. CIT [1972] 83 ITR 416 (SC); (xiii) CIT v. National Taj Traders [1980] 121 ITR 535 (SC); (xiv) CIT v. AutoJin Ltd. [1985] 151 ITR 741 (AP); (xv) CIT v. Kulu Valley Transport Co. (P.) Ltd. [1970] 77 ITR 518 (SC); (xvi) CIT v. TV. Sundaram Iyengar and Sons (P.) Ltd. [1975] 101 ITR 764 (SC); (xvii) CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC); & (xviii) CWT v. India Exchange Traders' Association [1992] 197 ITR 356 (Cal.). 48. The learned Departmental Representative, however, sought to distinguish the aforesaid decisions on the ground that these nowhere dealt with the subject-matter under consideration in the present appeal. 49. We have examined the rival submissions and have also perused the material on record to which our attention was invited. The decisions cited at the bar have also been duly considered. We would, at the outset, like to refer to the provisions of Section 115J itself. Clause (1A) speaks of a profit and loss account to be prepared in accordance with Parts II and III of Schedule VI to the Companies Act, 1956. Clause (iv) of the Explanations the section speaks of Section 205 of the Companies Act. Then again Part II of Schedule VI refers to the "amount provided for depreciation" and if no such provision is made then a note disclosing "the quantum of arrears of depreciation computed in accordance with Section 205(2) of the Act" is to be given. 50. It becomes quite clear that the provisions of the two enactments are inter-linked. One of the arguments advanced before us by the learned counsel for the assessee was that the Assessing Officer could not interpret the provisions of the Companies Act and had to restrict himself to the provisions of the Income-tax Act. The Hon'ble Andhra Pradesh High Court in the case of V.V. Trans-Investments (P.) Ltd. (supra) has taken the view that provisions of Section 205(1)(b) of the Companies Act are written out verbatim in Section 115J of the Income-tax Act and the latter section is to be read accordingly. In other words, it is legislation by incorporation. This belies the argument of the learned counsel. 51. For purposes of working out the "book profit" under Section 115J an assessee has to prepare a profit and loss account in accordance with Parts II and III of Schedule VI of the Companies Act. In case, the legislative intent was not to rely on the provisions of the Companies Act then reference to them in Section 115J could have been altogether excluded. Even the note disclosing the arrears of depreciation if not provided refers to a calculation under Section 205(2) of the Companies Act. 52. The argument of the learned counsel to the effect that profit and loss account prepared for purposes of Section 115J is sacrosanct and cannot be tampered with appears quite attractive initially, but this according to us, would mean a profit and loss account which reflects entries in the books of account maintained by the assessee on a regular and consistent basis from year to year and prepared in accordance with relevant provisions of the Companies Act. Fraud, mis-representation and mala fides should be absent. This view finds support from the Special Bench decision of Sutlej Cotton Mills Ltd.'s case [supra]. Now in the present case it is an undisputed fact that the assessee passed an entry in its books of account providing depreciation of Rs. 46.82 crores on 31-3-1990, but reversed the same while closing the books on 30-6-1990. It passed another entry on the same date providing depreciation of Rs. 9.08 crores in accordance with the "straight-line" method followed in the past. In other words, the entry of Rs. 46.82 crores was set at nought. It could in fact be described as a superfluous entry not related to any figure of assets or W.D.V. recorded in the books of account. These facts by themselves make this case different to the ones relied upon by the learned counsel. To mention one in the case of Modern Woollens Ltd. (supra), the assessee had changed its method of charging depreciation and thereafter followed the changed method in the subsequent years as well. It is not so in the present case. 53. Then again as per Part III of Schedule VI anything over and above the amount which can be considered as a provision towards depreciation would be treated as a reserve and required to be added to the "book profit". In the present case, the Directors were of the opinion that a figure of Rs. 6.11 crores represented the provision for depreciation on the "straight-line" method followed in the past as also subsequently. Hence, the difference between the figure claimed under Section 115J, viz., Rs. 46.82 crores and Rs. 6.11 crores, viz., Rs. 40.71 crores would be a reserve. 54. We do not propose to advert to the "legislative intent" in bringing on the Statute book Section 115J as this is already discussed in the orders of the tax authorities as also the various decisions of the Tribunal referred to during the course of the hearing. One thing, however, is quite clear and that is that computation under Section 115J has to be related to actual entries in the books of account on the basis of the "consistent method" followed subject to the "adjustments" stipulated by the section itself. There is no scope for any entry or claim including depreciation at the whims and fancy of an assessee primarily with a view to defeat the purpose of the enactment. Any such claim would have to be added back. 55. The question of depreciation has further to be examined in the light of the provisions in the Companies Act and the Income-tax Act vis-a-vis the amendments to both in 1988. The Commissioner of Income-tax (Appeals) in his order has discussed the changes and the "delinking" of depreciation under the Companies Act from that under the Income-tax Act. There is also the reference to a circular issued by the Department of Company Affairs on 7-3-1989 providing for a "technological evaluation" for justifying a higher rate of depreciation. It is an admitted fact that in the present case there is no such "technological evaluation" available. The Commissioner of Income-tax (Appeals) has also adverted to the changes in the depreciation rates stipulated by the two Acts vis-a-vis Income-tax (IIIrd Amendment) Rules, 1987 w.e.f. 2-4-1987 and the corresponding amendment in the Companies Act by insertion of Schedule XIV providing rates of depreciation w.e.f. the same date viz., 2-4-1987. 56. We may at this stage refer to the decision of the Cochin Bench of the Tribunal in the case of Apollo Tyres Ltd. (supra) wherein it was held as follows: Since the assessee's previous year ended after the coming into force of Schedule XIV, for the first time unambiguous and clear liability was cast on the assessee to work out the depreciation on the basis of the rates prescribed in Schedule XIV.... The issue before the Tribunal was the computation of "book profit" under Section 115J. These observations of the Tribunal set at naught the argument of the learned counsel to the effect that Schedule XIV has a restricted operation vis-a-vis Sections 205 and 350 of Companies Act only. We are also of the view that the Directors of a company do not have any such power which would enable them to claim depreciation outside the purview of any legislative enactment. Section 115J clearly contemplated depreciation in accordance with the Companies Act and not the Income-tax Law and any other rate would have to be supported by a "technological evaluation". In case it was felt that income-tax rates were rationale and acceptable for purposes of Section 115J then nothing further need have been written in Section 115J. The entire issue has to be examined in the light of the amendments brought about in 1988 in the Income-tax Act and the Companies Act with reference to depreciation and the intention behind introducing Section 115J. All these have been discussed at length by the tax authorities in their respective orders and a decision arrived at with which we wholly agree. 57. In the final analysis, we uphold the order of the Commissioner of Income-tax (Appeals) and reject the relevant ground in the appeal. 58. The next ground in the appeal questions the action of the tax authorities in including a sum of Rs. 18,79,83,193 earned as short-term capital gain as part of the "book profit" for purposes of Section 115J. It is not disputed between the parties that the aforesaid short-term capital gain arose as the result of sale of certain Government securities. In the course of the assessment proceedings as also the appeal before the Commissioner of Income-tax (Appeals) the assessee relied upon the decision of the Special Bench of the Tribunal in the case of Sutlej Cotton Mills Ltd. (supra] for the proposition that capital gain was not required to be included for working out the book profit and it was only the income arising as a result of the business activities of the assessee that were required to be included. 59. The Assessing Officer, however, distinguished the decision of the Special Bench primarily on the ground that capital gain which was not chargeable under Section 45 was not required to be taken into account for the purposes of Section 115J. The relevant observations recorded by the Assessing Officer appear in paras 23 and 24 of the assessment order. On further appeal, the Commissioner of Income-tax (Appeals) confirmed the view taken by the Assessing Officer taking further note of the fact that the said capital gain had been taken into consideration while declaring dividend. We may mention that this fact was also referred to by the Assessing Officer. 60. We have examined the rival submissions, the learned counsel reiterating reliance on the Special Bench decision whereas the learned Departmental Representative strongly supported the orders passed by the tax authorities. The subsequent arguments advanced by him were more or less on the same lines as echoed by the representative of the Department, who argued the appeal before the Special Bench. 61. In our opinion, there is substantial merit in the arguments advanced by the assessee's counsel for canvassing that capital gain be excluded from the purview of Section 115J. No doubt, there are certain distinguishing features in so far as the present assessee is concerned vis-a-vis the facts noted in the Special Bench decision. One such fact was that in the latter case the capital gain was not routed through the profit and loss account, but taken directly to the balance sheet and secondly, the assessee had invested such gains in approved investments and there is a clear finding of fact recorded to the fact that the gains were not available for distribution of dividend. In the present case, however, the capital gain found a place in the profit and loss account and it is not disputed that the same was utilised for declaring a dividend and no relief was sought on account of investment in approved modes. According to us, entries in the books of account are not determinative of the exact nature of a transaction and one has to take a decision after ascertaining the legislative intent as also the rationale behind the introduction of a particular provision and in this case we mean Section 115J. Before we proceed further, we would like to reproduce certain observations recorded by the Special Bench as follows: A reference to the requirements of the Companies Act shows that it is concerned with the result of the working of the company. Consequently, it cannot be directly concerned with changes in the capital structure. In particular, the profit and loss account is concerned with items of income and expenditure and, therefore, any profit derived by realisation of the capital asset would not be an item of income. JUDGEMENT_2686_TLIT0_19941.htm JUDGEMENT_2686_TLIT0_19941.htm As a matter of sound accepted accounting practice, the assessee was entitled to treat the accretion to a fixed asset when realised as a capital reserve particularly when the realised amount has been reinvested in another asset and was not available for distribution as profit. We are, therefore, of the opinion that the profit realised by the sale of the shares by the assessee could not form part of the book profit as required to be shown in the profit and loss account under the provisions of the Companies Act. JUDGEMENT_2686_TLIT0_19941.htm The alternative contention of the revenue was that the expression 'book profit' in Section 115J cannot be confined to income from business but would include whatever income is derived by the company keeping in view the legislative history and the intention of Parliament to bring to tax the income of the companies which reduced their taxable income to NIL by claiming various deductions. But we do not find any support for this contention from the legislative history as outlined above. When Section 80WA was introduced in 1983-84, the intention was to restrict the various tax incentives and concession available in computing the income from business to 70 per cent thereof. Significantly, the deduction under Section 80T in respect of capital gains was not one of the items of concession or tax rebate which was to be restricted under that section. This shows that exemption of capital gains was not intended to be restricted. Subsequently also, when that section was replaced by Section 115J, the object was to introduce a provision whereby every company will have to pay a minimum corporate tax on the profits declared by it in its own accounts. These profits can only be those which are assessable as income under the Act. It is now well-settled that, in the interpretation of statutes, we have to adopt such a construction as will promote the general legislative purpose underlying the provision. In the present case, as can be seen from the Finance Minister's Speech and the Memorandum explaining the provisions, the intention was to make the company pay tax on income which would otherwise be reduced by reason of certain deductions available under the Act. Even the adjustments specified in Section 115J refer only to appropriation from the profits of the business. We are, therefore, convinced that the expression 'book profit' was intended to be confined to business profit and was not intended to include profit on realisation of any asset. 62. The aforesaid views expressed by the Tribunal leave us in no doubt that what was required to be included for purposes of computing the book profit was the income from the business activities of the company and not any income which arose to it on account of capital gains. The Special Bench has discussed the provisions of Section 80WA which were replaced by Section 115J and taken specific note of the fact that deduction under Section 80T in respect of capital gains was not required to be restricted under the replaced section. There is also a discussion on the Memorandum and the speech of the Finance Minister with reference to the provisions of Section 115J. The Tribunal has further observed that on the basis of sound accepted accounting principles an assessee was entitled to treat the accretion to a fixed asset when realised as a capital reserve "particularly when the realised amount has been re-Invested in another asset and was not available for distribution as profit". According to us, the latter observation does not qualify the earlier one and does not take away the relief envisaged. In other words, capital gains were not required to be included for purposes of Section 115J and more so when the funds were not available for distribution as profit having been re-invested in another asset. Following the Special Bench decision (supra) we direct the Assessing Officer to exclude the short-term capital gains the quantum not under dispute from the computation of book profit under Section 115J. 63. The last ground in the appeal viz., 8.0 reads as under: Further, without prejudice, the learned authorities below are not justified in refusing to make adjustment of brought forward depreciation and loss of earlier years, as provided in Explanation to Section 115J. 64. The learned counsel urged that necessary directions be given to the Assessing Officer to allow relief as and when it became available as a result of modifications to the figure of income vis-a-vis brought forward depreciation and loss of earlier years. The learned Departmental Representative, on the other hand, opposed the aforesaid submissions on the ground that no such brought forward depreciation or loss existed for the earlier years and nothing was required to be set off. In our opinion, no prejudice would be caused to any party if we direct the Income-tax Officer to examine this issue while giving appeal effect to our order, but strictly within the parameters of law. 65. In the result, the appeal is partly allowed.;


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