Income Tax Appellate Tribunal - Indore
Hind Syntex Ltd. vs Deputy Commissioner Of Income Tax on 6 March, 1998
Equivalent citations: [1998]67ITD36(INDORE)
ORDER
S.K. Yadav, J.M.
1. These appeals are preferred by the assessee against the orders of the CIT(A) pertaining to the asst. yr. 1988-89. Since these appeals were heard together, they are disposed of by this single consolidated order for the sake of convenience.
ITA No. 655/Ind/95 :2. This appeal has arisen out of the order of the reassessment framed under s. 143(3)/147 of the Act. In this appeal the order of the CIT(A) is assailed on various grounds. Mainly the assessee has challenged the validity of reopening of assessment under s. 147(a) of the Act and addition of Rs. 95,17,841 in the computation of income under s. 115J of the Act.
3. Briefly stated, the assessee is a public limited company doing the business of manufacture of synthetic blended yarn. The previous year relevant to the assessment year involved ended on 30th April, 1990. The assessee has filed the original return on 21st June, 1988, declaring income at Rs. 35,66,693 which was later on revised by filing a revised return on 6th March, 1989, declaring income therein at Rs. 25,42,627 before completion of assessment claiming non-applicability of the provisions of s. 115J of the Act. The income was assessed under s. 143(1)(a) on 30th March, 1989, at Rs. 25,42,627. Later on, the AO passed a rectification order under s. 154 of the Act and computed the income under s. 115J of the Act and made an addition of Rs. 10,35,066 against which an appeal was filed before the CIT(A) but the assessee could not succeed and it has filed an appeal before us vide ITA No. 565/Ind/1991.
4. The assessee had been following the method of providing depreciation on the straight line method till the previous year ended on 30th April, 1986 relevant to the asst. yr. 1987-88. The assessee changed the method of providing depreciation from the asst. yr. 1988-89 from straight line method to WDV method and, accordingly, depreciation was charged at Rs. 2,60,84,138. In the subsequent assessment year i.e. 1989-90 the assessee again changed the method of providing depreciation consequent to the introduction of Sch. XIV to the Companies (Amendment) Act, 1988 and filed the return of income before the Revenue authorities. During the course of assessment for the asst. yr. 1989-90 the AO noticed from the annual report in which the assessee has notified at item No. 6 in the notes of account that the company has provided for depreciation on the written down value method as per the rates specified under the IT Rules, 1962 upto 1st April, 1987. Consequent to the introduction of Sch. XIV of the Companies (Amendment) Act, 1988, the company has provided for depreciation as per the rates specified therein for a period of 2nd April, 1987, to 30th April, 1987, and in view of the above change the company has written back the excess provision of depreciation amounting to Rs. 12,86,486. Relying upon the information with regard to the earlier assessment year the AO has reopened the assessment for the asst. yr. 1988-89 after forming an opinion that the income chargeable to tax has escaped assessment as it will have an impact on the working of income under s. 115J of the Act. Consequently after issuing a notice under s. 148 the reassessment was framed under s. 143(3)/147 of the Act and he made the addition of Rs. 9,61,784 as excess depreciation charged in the assessment year. Aggrieved by the assessment order, the assessee carried the matter before the CIT(A) but the fortune did not fluctuate. Now, the assessee is before us.
5. The learned counsel for the assessee, Shri S. S. Deshpande, has submitted that as per the Company Law during the relevant assessment year the assessee was at liberty to adopt any of the methods for providing depreciation on its assets and the assessee changed the method from straight line to WDV method during the previous year ended on 30th April, 1987, relevant to the asst. yr. 1988-89. The accounts were finalised on 30th June, 1987, and adopted by the AGM in its meeting held on 17th October, 1987. Till the date of adoption of the balance sheet of the assessee, there was no amendment with regard to the computation of depreciation on the assets of the assessee. He has invited our attention to the departmental circulars of the Company Law Board that the assessee may charge higher rate of depreciation. He further invited our attention to the notes given in some magazine of Chartered Accountants in which it is mentioned that under the Companies Act the Board of Directors of the company is required to prepare a balance sheet and P&L a/c in relation to every financial year and lay the same before the company in general meeting. Ordinarily the accounts once accepted at the general meeting cannot be reopened. It is further specified in the notes that after due consideration by the counsel at its 106th meeting it has been decided that the reopening or rectification of accounts after the annual general meeting should not be permitted under any circumstances. Mr. Deshpande further urged that the Companies (Amendment) Bill pertaining to the introduction of Sch. XIV in the Companies Act was passed on 24th May, 1988, with retrospective effect from 2nd April, 1987, for providing depreciation as per Sch. XIV of the Companies Act. Consequent to this amendment, the assessee had to change its method for providing depreciation again from WDV method to the method prescribed as per Sch. XIV of the Companies Act. Since this Schedule had come in effect from 2nd April, 1987, the assessee has written back the excess charged depreciation for the period 2nd April, 1987, to 30th April, 1987, in the accounts for the succeeding previous year relevant to the asst. yr. 1989-90 and a note to this effect was given in the annual report for the first period i.e. from 1st May, 1987, to 30th April, 1988, for the asst. yr. 1989-90. There was no concealment of suppression of facts on the part of the assessee for the asst. yr. 1988-89 for which the assessment can be reopened under s. 147(a) of the Act. Mr. Deshpande further argued that for the purpose of s. 115J of the Act, the net profit was to be computed in accordance with the provisions of Part II and III of the VI Sch. to the Companies Act, 1956 during the relevant assessment year and the amount of depreciation would be computed in the same fashion as if the provisions of cl. (b) of first proviso to sub-s. (1) of s. 205 of Companies Act, 1956, are applicable. Since the assessee could not reopen his accounts after the introduction of Sch. XIV by the Companies (Amendment) Act, 1988, due to adoption of balance sheet in its AGM prior to the implementation of this Act, the assessee has written back the excess charged depreciation in the succeeding previous year and offered it to tax as permissible under the law. By doing so, the assessee has not violated any provisions of law or suppressed any material facts from the Revenue authorities. Since Sch. XIV was introduced w.e.f. 2nd April, 1987, the assessee has rightly written back the excess charged depreciation for the period of 2nd April, 1987, to 30th April, 1987, and not for the whole year for which he has charged depreciation as per WDV method permissible under the Companies Act. With regard to the contention of charging of higher depreciation, the assessee has placed reliance on the following judgments :
(i) Asstt. CIT vs. S. A. Plant (P) Ltd. (ITA No. 502/Ind/1993 decided by ITAT, Indore, on 28th August, 1997); and
(ii) Apollo Tyres Ltd. vs. Dy. CIT (1992) 43 ITD 464 (Coch).
6. With regard to reopening of assessment under s. 147 of the Act, the assessee has also placed reliance on the Star Automobiles vs. ITO (1989) 178 ITR 613 (MP) and Indian Oil Corporation vs. ITO (1986) 159 ITR 956 (SC).
7. With regard to ground No. 5 in which the assessee has assailed the order of the CIT(A) for his observation that deductions under ss. 80HH and 80-I are not allowable to the assessee independently on the ground that it is only academic, Mr. Deshpande has submitted that since this issue has become academic he has no grievance against the order of the CIT(A). Nonetheless, he relied on the judgment of the M.P. High Court in the case of J.P. Tobacco Products (P) Ltd. vs. CIT 24 ITC 378 in which it was held that the deduction under ss. 80HH and 80-I shall be allowed from the gross total income independently.
8. In oppugnation, the learned Departmental Representative, S.K. Singh, has supported the observations of the AO and the CIT(A) made in their respective orders. Besides, he has invited our attention to the fact that the original return was filed on 21st June, 1988, after the commencement of Companies (Amendment) Act, 1988 as the Presidential assent was given to the Companies (Amendment) Bill on 24th May, 1988. The return of income was further revised by filing a revised return on 6th March, 1989, but the assessee did not opt to declare or to put a note in its original return of income or revised return about the excess charged depreciation in the relevant previous year. The assessment was framed on the basis of the return filed by the assessee. In the subsequent assessment year i.e. 1989-90 when the return was filed along with the annual report and it was noticed from that return that excess depreciation was charged, the assessee's case was re-examined and it was found that in the relevant assessment year the assessee has changed the method for providing depreciation from straight line method to WDV and accordingly higher rate of depreciation was charged. The assessee-company is a public limited company and is advised by the financial experts on the Companies Law and income-tax matters. Had the assessee been so sincere with regard to the amendments in the Companies Act, he would have disclosed or put a note in the return of income about the excess charge of depreciation in the return of income for the relevant assessment year stating therein the reasons for not computing the depreciation as per Sch. XIV which was made applicable by the Amendment w.e.f. 2nd April, 1987, prior to the end of the accounting period of the assessee. There is no dispute that the assessee can charge a higher rate of depreciation but for that purpose he has to put a note in the return of income stating therein the reasons and circumstances under which the higher depreciation was charged. In the instant case, the assessee has originally charged higher depreciation as per WDV method for the whole previous year relevant to the asst. yr. 1988-89, and thereafter wrote back the excess depreciation consequent to the introduction of Sch. XIV for the period from 2nd April, 1987, to 30th April, 1987, in the subsequent assessment year. If the assessee is of the view that at the end of the accounting period Sch. XIV is to be applicable, he should have written back the excess charged depreciation for the whole year in consequence to the introduction of Sch. XIV of the Companies Act. Mr. Singh has invited our attention to the provisions of ss. 205, 349(4)(k) and 350 of the Companies Act. Our attention was also invited to Parts-II and III of Sch. VI of the Companies Act. It was urged by him that as per s. 350 of the Companies Act the depreciation shall be calculated with reference to WDV of the asset as shown by the books of the company at the end of the financial year expiring at the commencement of this Act or immediately thereafter and at the end of the each subsequent financial year at the rate specified in Sch. XIV. He further argued that there is no provision in the Companies Act, which suggests that different rates of depreciation on the asset can be charged for a different period. There may be some provisions in the Act that for different assets, different rates of depreciation can be charged, but for the same assets different depreciation cannot be charged in one previous year. In the instant case, the assessee's accounting period ended on 30th April, 1987, and Sch. XIV is applicable w.e.f. 2nd April, 1987. It means that at the end of the accounting period the depreciation is to be calculated at the rate prescribed under the Companies Act and as per the Companies Act on 30th April, 1987 Sch. XIV was in force and depreciation should have been calculated as per Sch. XIV. If the assessee could not withdraw the excess charged depreciation for the whole year in the relevant asst. yr. 1988-89, he should have written back the excess charged depreciation for the whole year in the next assessment year along with the note stating therein the reasons for non-withdrawal of the excess charged depreciation in the relevant assessment year. It was further urged by him that by non-disclosure of the excess charged depreciation in the return of income filed after the introduction of Sch. XIV, the assessee has suppressed the material facts from the Revenue authorities which was later on discovered from the annual report filed along with the return of income for the succeeding assessment year in which the entire excess depreciation charged was not written back and the same has resulted into escapement of income. In these circumstances, the reopening of assessment was proper and the addition made by the lower authorities is justified.
9. We have heard the rival submissions of the parties and have carefully perused the orders of the authorities below and the documents placed on record. The relevant provisions of law referred to by the parties are also examined by us. Ground No. 1 relates to reopening of assessment under s. 147(a) of the Act. With regard to this issue we find force in the arguments of the Revenue and we are inclined to uphold the observations of the CIT(A) on this count. It is obvious from record that the books of accounts for the relevant asst. yr. 1988-89 were closed and audited on 30th June, 1987, which were later on adopted by the AGM on 17th October, 1987. Sch. XIV was introduced in the Companies Act through the Companies (Amendment) Act, 1988 on 24th May, 1988 with retrospective effect from 2nd April, 1987. The original return of income was filed on 21st June, 1988 after the introduction of Sch. XIV in the Companies Act which was later on revised on 6th March, 1989 but in any of the returns nothing was notified about the excess charged depreciation in the relevant assessment year which was provided on account of change in the method for providing depreciation from straight line method to WDV method in the relevant previous year. We may agree with the contention of the assessee that at the time of preparation of the accounts of the assessee-company and its adoption by the AGM, Sch. XIV was not brought on the statute and as per the accounting principles laid down by the Chartered Accountants Institute, the books of accounts once closed and adopted by the AGM, should not be reopened under any circumstances but we do not understand why the assessee did not disclose or put a note with in regard to non-withdrawal of the excess charged depreciation in the relevant assessment year if the return of income, was filed after introduction of Sch. XIV in the Companies Act according to which the assessee has admittedly provided the excess depreciation. These facts became known to the Revenue from the annual report filed along with the return of income for the subsequent assessment year i.e. 1989-90. Relying upon this information the case of the assessee was examined and it was found that the assessee has provided excess depreciation in the asst. yr. 1988-89 which affects the profits computed under s. 115J of the Act.
10. We have carefully perused the judgments of Star Automobiles vs. ITO and IOC vs. ITO (supra) and find that it was held by the Hon'ble Supreme Court in the case of IOC vs. ITO (supra) that the AO must have reason to believe that the income or profits or gains chargeable to tax had been underassessed or escaped assessment. There must be material to come to the conclusion that there was omission or failure to disclose fully or truly all material facts necessary for the year. Their Lordships have further held that this postulates a duty on every assessee to disclose fully and truly all material facts necessary for assessment. Therefore, the obligation is upon the assessee to disclose facts; secondly those facts should be material; thirdly disclosure must be full and fourthly true. What the facts are material and necessary for assessment will differ from case to case. In every assessment proceedings for computing or determining proper tax due from the assessee, it is necessary to know all the facts which help the assessing authority in coming to the correct conclusion.
11. In the instant case, it is not a case of the assessee that he has not charged excess depreciation in the relevant assessment year. Once it is an admitted fact that the excess depreciation was provided by the assessee in the relevant assessment year which has affected the computation of income under s. 115J of the Act, we have to see what were the circumstances which prevented the assessee from disclosing the reason for non-withdrawal of excess charged depreciation in its return of income filed after the introduction of Sch. XIV of the Companies Act, but unfortunately we do not find any justification on record from which it can be deduced that the non-disclosure of this fact was a bona fide mistake of the assessee. In these circumstances, we find that there was sufficient material for the AO to have a reasonable belief that the assessee has failed to disclose fully and truly material facts necessary for assessment for that year and the income chargeable to tax has escaped assessment for that year. We, therefore, subscribe the view of the CIT(A) on this point.
12. Now we come to the next issue with regard to excess charged depreciation. In ground Nos. 2 to 4 the assessee has assailed the order of the CIT(A) from all corners that he has erred in sustaining the addition of Rs. 95,17,841 made by the AO for the reasons that the assessee has provided the excess depreciation for the whole accounting year not for the period from 2nd April, 1987, to 30th April, 1987, for which the assessee has written back the excess depreciation in the next assessment year. Since the income was assessed under s. 115J of the Act, we would like to examine the relevant provisions of s. 115J of the Act applicable during the relevant assessment year. As per Explanation to sub-s. (1) the net profit is to be prepared in accordance with the provisions of Parts II and III of Sixth Sch. to the Companies Act, 1956. While computing the book profit for the purpose of s. 115J of the Act, the net profit worked out as per Parts II and III of the Sch. VI to the Companies Act are required to be reduced by the amount of loss or the amount of depreciation which would be required to be set off against the profit of the relevant previous year as if the provisions of cl. (b) of the first proviso to sub-s. (1) of s. 205 of the Companies Act, 1956, are applicable. It means the depreciation is to be worked out as per the provisions of s. 205 of the Companies Act. For examining the provisions of cl. (b) of sub-s. (1) of s. 205 of the Companies Act, we feel it proper to reproduce the same hereunder :
"205(1)...... xxxxx xxxxx (a) xxxxx xxxxx xxxxx
(b) if the company has incurred any loss in any previous financial year or years, which falls or fall after the commencement of the Companies (Amendment) Act, 1960, then the amount of the loss or an amount which is equal to the amount provided for depreciation for that year or those years whichever is less, shall be set off against the profits of the company for the year for which dividend is proposed to be declared or paid or against the profits of the company for any previous financial year or years, arrived at in both cases after providing for depreciation in accordance with the provisions of sub-s. (2) or against both."
13. Sec. 205(1)(b) of the Companies Act says that the amount of loss or an amount which is equal to the amount provided for depreciation for that year or those years, whichever is less, shall be set off against the profits of the company for the year for which dividend is proposed to be declared or paid or against the profits of the company for any previous financial year or years arrived at in both the cases after providing for depreciation in accordance with the provisions of sub-s. (2) or against both. Sub-s. (2) of the Companies Act lays down the formula for computing the depreciation. For ready reference, we prefer to reproduce the relevant provisions of sub-s. (2) of s. 205 of the Companies Act :
"205(2) For the purpose of sub-s. (1), depreciation shall be provided either :
(a) to the extent specified in s. 350; or
(b) in respect of each item of depreciable asset, for such an amount as is arrived at by dividing ninety-five per cent of the original cost thereof to the company by the specified period in respect of such asset; or
(c) on any other basis approved by the Central Government which has the effect of writing off by way of depreciation ninety-five per cent of the original cost to the company of each such depreciable asset on the expiry of the specified period; or
(d) as regards any other depreciable asset for which no rate of depreciation has been laid down by this Act or any rules made thereunder, on such basis as may be approved by the Central Government by any general order published in the Official Gazette or by any special order in any particular case."
Provided that where depreciation is provided for in the manner laid down in cl. (b) or cl. (c), then, in the event of the depreciable asset being sold, discarded, demolished or destroyed the written down value thereof at the end of the financial year in which the asset is sold, discarded, demolished or destroyed shall be written off in accordance with the proviso to s. 350."
14. From a plain reading of this sub-section it is obvious that various methods are laid down for providing depreciation but for providing higher depreciation the assessee has to put a specific note stating therein the reasons for claiming higher depreciation otherwise the depreciation is to be worked out in accordance with s. 350 of the Companies Act which says that depreciation shall be calculated with reference to the written down value of the assets, as shown by the books of the company, at the end of the financial year expiring at the commencement of this Act or immediately thereafter and at the end of the each financial year at the rate specified in Sch. XIV. For ready reference this section is also reproduced below :
"350. The amount of depreciation to be deducted in pursuance of cl. (k) of sub-s. (4) of s. 349 shall be the amount calculated with reference to the written down value of the assets as shown by the books of the company at the end of the financial year expiring at the commencement of this Act or immediately thereafter and at the end of each subsequent financial year at the rate specified in Sch. XIV :
Provided that if any asset is sold, discarded, demolished or destroyed for any reason before depreciation of such asset has been provided for in full, the excess, if any, of the written down value of such asset over its sale proceeds or, as the case may be, its scrap value, shall be written off in the financial year in which the asset is sold, discarded, demolished or destroyed."
15. From a careful perusal of the aforesaid sections it has become abundantly clear that the depreciation shall be ascertained at the end of the accounting/financial year in accordance with the relevant provisions of the Act which are in force at the relevant point of time. It is obvious from record that the accounting year of the assessee relevant for the asst. yr. 1988-89 ended on 30th April, 1987, and the original return of income was filed on 21st June, 1988, which was later on revised on 6th March, 1989. The Presidential assent was given to the Companies (Amendment) Bill, 1988 on 24th May, 1988, whereby Sch. XIV was introduced to the Companies Act with retrospective effect from 2nd April, 1987. It means at the end of the accounting year of the assessee i.e. 30th April, 1987, when the depreciation of assets is required to be ascertained, Sch. XIV was applicable, and the assessee was supposed to provide depreciation as per Sch. XIV of the Companies Act. We do not find anywhere in the Act which suggests that the assessee can provide different rates for depreciation on the same asset in one accounting year. Since the depreciation is to be ascertained at the end of the accounting year, we are of the view that the rates provided by the relevant law at that time are to be applicable for its ascertainment. In the instant case, on 30th April, 1987, when the accounting year was ended, the depreciation should have been ascertained at the rates provided in Sch. XIV of the Companies Act which was applicable at the relevant point of time. We may agree with the submissions of the assessee that Sch. XIV was introduced after the closure of the books of accounts and its adoption by the AGM and its reopening was not permissible or advisable by the rules or guidelines laid down by the Institute of Chartered Accountants but in that eventuality the assessee could have notified the reasons of non-withdrawal of excess charged depreciation in its return of income filed after the date of introduction of Sch. XIV to the Companies Act. Moreover, in the succeeding accounting year the assessee did not write back the entire excess charged depreciation in its books of accounts and has only written back the excess charged depreciation for the period 2nd April, 1987, to 30th April, 1987 on the ground that Sch. XIV was effective from 2nd April, 1987. We are unable to agree with this contention of the assessee.
16. From a careful perusal of record we find that since the assessment was rightly reopened under s. 147(a) of the Act and the assessee has provided the excess depreciation in the relevant assessment year, the Revenue authorities are justified in disallowing the excess charged depreciation at Rs. 95,17,841 during the course of reassessment framed under s. 143(3)/147 of the Act.
17. Having regard to the aforesaid observations, we find ourselves in agreement with the view of the CIT(A) on this count.
18. With regard to the ground No. 5 which relates to deductions under ss. 80HH and 80-I we agree with the view of the CIT(A) that since the tax has been charged on book profit as per the provisions of s. 115J of the Act and not on the computation of total income according to the normal provisions of the Act, the issue regarding deductions claimed under ss. 80HH and 80-I becomes academic and needs no adjudication. However, we agree with the contention of the assessee that this issue is squarely covered by the judgment of the jurisdictional High Court in the case of J.P. Tobacco (supra).
ITA No. 656/Ind/1991 :19. This appeal is emanated from the order passed under s. 154 of the Act by the AO against which an appeal was filed before the CIT(A) but the assessee could not succeed. The facts pertaining to this appeal have already been discussed in earlier appeal. Since it has been held in earlier appeal that the reopening of assessment under s. 147(a) is proper and the addition made during the course of reassessment framed under s. 143 r/w s. 147(a) with regard to excess charged depreciation in the relevant assessment year is justified as well, in earlier appeal, we do not find any fruitful purpose in adjudicating this appeal on merits.
20. Nonetheless we have carefully perused the order of the CIT(A) who has confirmed the rectification order passed under s. 154 of the Act but we do not find any infirmity therein.
21. In the result, both the appeals are dismissed.