Income Tax Appellate Tribunal - Ahmedabad
Vitrag Dyeing & Printing Mills ... vs Assessee on 26 November, 2007
IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD, "A" BENCH
(BEFORE S/SHRI D.K. TYAGI,JM & A.N. PAHUJA, AM)
ITA no.265/Ahd/2008
[Asstt. Year : 1998-1999]
Vitrag Dyeing & Printing Mills Vs. ACIT, Circle-4
Private Limited Aayakar Bhavan, Majura Gate,
201, Anand Market Surat.
Ring Road, Surat.
(Appellant) (Respondent)
Assessee by : Shri S.N.Soparkar,AR
Revenue by : Shri S.K. Meena,DR
ORDER
A.N. PAHUJA: This appeal by the assessee filed on 23.1.2008 against an order dated 26.11.2007 of the ld. CIT(Appeals)-I, Surat, raises the following grounds:
"1. The ld.CIT(A) has grossly erred n law and on facts in confirming the book profit under Section 115JA of Rs.55,19,873/-;
2. The appellant craves leave to add, alter, delete or modify any ground of appeal. "
2. Facts, in brief , as per relevant orders are that return declaring nil income filed on 30.11.1998 by the assessee company, engaged in the business of dyeing and printing on job work basis, after being processed u/s 143(1) of the Income-tax Act,1961[hereinafter referred to as the 'Act'] was taken up for scrutiny with the service of a notice u/s 143(2) of the Act on 2.10.1999.Subsequently,assessment was completed u/s 143(3) of the Act on 20.12.2000.While determining book profits u/s 115JA of the Act, the Assessing Officer[ AO in short],inter alia, added earlier years' depreciation of Rs.55,19,873/-. On appeal, the said addition was deleted by the CIT(A).On further appeal by the Revenue before the ITAT, it was pleaded that the ld. CIT(A) failed to consider clause (iii) of the explanation to sec. 115JA of the Act and therefore, the matter should be restored back to the file of the CIT(A). Accordingly, the ITAT vide their order dated 4-8-2006 in ITA no.1732/Ahd/2005 restored the issue back to the file of the ld. CIT(A) for proper appreciation and consideration of clause (iii) of the explanation below section 115JA(2) of the Act.
ITA No.265/Ahd/20083. In pursuance to the aforesaid directions of the ITAT , the ld. CIT(A) after considering the aforesaid clause (iii) of the explanation below section 115JA(2) of the Act and submissions of the assessee, concluded as under:
"2.1 I have considered the submissions made by the appellant and observation oft he AO. The Hon'ble Supreme Court in the case of Apollo Tyres (supra) has simply stated that if the addition and reduction are as per the provisions of section 115JA then they would be in order but no disallowance other than those covered under the Explanation can be trade by the AO if the P&L A/c. are made as per Schedule-VI of Companies Act. It is very clear that this decision of Hon'ble Supreme Court would not be applicable if the disallowance made by the AO is as per the provisions of section 115JA. As stated above, the provisions of clause (iii) of Explanation below section 115JA(2) clearly says that the book profit have to be reduced by any amount of loss brought forward or unabsorbed depreciation whichever is less as per the books of accounts. Clause (iii) says that the loss shall not include depreciation meaning thereby that it should be pure business loss bereft of depreciation and it also says that the provisions of this clause was not applicable if the amount of loss brought forward or unabsorbed depreciation is nil. The meaning of this provision is that if the unabsorbed loss or brought forward depreciation is nil then no deduction has to be allowed for computing the book profit. Neither during the assessment order nor during the appellate proceedings before the CIT(A) as well as ITAT in the earlier proceedings the appellant pointed out that it has loss and unabsorbed depreciation is not nil. Even during the current appellate proceedings despite the ITAT mentioning clearly that this clause has to be considered the appellant has failed to show that its loss is not nil and that if the loss is more then the unabsorbed depreciation would be allowable. As regards the claim of earlier year depreciation during the current year amounting to Rs.55,19,873/- it is seen that although the appellant is required to claim depreciation regularly in every year and if it had done so this depreciation would have been appearing in the balance sheet as unabsorbed depreciation. Just because the appellant has not claimed the depreciation in the earlier year and has claimed it for the first time in the current year it cannot be called that it is a current year's depreciation. Its character remains that of unabsorbed deprecation as per Companies Act and as per Schedule-V1. "Therefore this depreciation is contrary to the provisions of Schedule-VI of the Companies Act. In view of this reason the disallowance made by the AO of this claim is correct as it is not as per Schedule-VI of the Companies Act. In the present case the Auditors have remarked in the earlier year that the appellant has not charged depreciation and the Auditors have also mentioned in the current year that the assessee has charged deprecation of earlier years in the current year. Therefore -2- ITA No.265/Ahd/2008 there is a qualification by the Auditors. Since this amount is not as per the Companies Act the appellant cannot rely on the decision in the case of Apollo Tyres as in the present case the issue is that in which the Auditors have made qualification in the earlier years as well as in the current year. In the current year this qualification occurs at para II of the notes forming the part of account. Hence the disallowance made by the AO is as per the decision of Hon'ble Supreme Court in the case of Apollo Tyres (supra).
2.2 It is seen from the computation in the assessment order that the assessee has also claimed unabsorbed loss/depreciation whichever is less of Rs.6,23,745/-. During the appellate proceedings the appellant has not been able to explain as what is this figure. From the balance sheet of F.Y.1997-97 relevant to the current year it is seen that the previous figure shows that there is a carried forward loss of Rs.18,16,914/- as per Schedule X which is nothing but unabsorbed depreciation from earlier years. There is no brought forward loss. Further since the appellant has not given any figure regarding business loss, therefore, it is clear that the loss is nil and hence as per clause (b) of Explanation below clause (iii) of Explanation below section 115JA(2), no deduction of unabsorbed depreciation can be allowed. Therefore the disallowance of Rs.55,19,873/- made by the AO is correct."
4. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. AR on behalf of the assessee while inviting our attention to note 11 to the accounts contended that earlier the assessee was following straight line method of depreciation. During the year under consideration, the method of was changed to WDV and accordingly, depreciation of Rs. 55,19,873/- of earlier years' worked out under the WDV method was debited to the profit and loss account and consequently, loss of Rs.56,36,887/- was overstated. The ld. AR pointed out that clause (iii) of the explanation below section 115JA(2) of the Act was not applicable in their case and the ld. CIT(A) wrongly concluded that the aforesaid depreciation was unabsorbed depreciation as per the schedule VI of the Companies Act,1956. Inter alia, the ld. AR relied upon the decisions in Malayala Manorama Co. Ltd. v. Commissioner of Income-tax, 300 ITR 251 (SC); CIT Vs.Tidel Park Ltd., 334 ITR 126 (Mad) and decision dated 13-8-2010 of ITAT, Ahmedabad Bench in Indian Research Manifestation Labs Pvt. Ltd. Vs. ACIT, in ITA No.391/Ahd/2008 and 510/Ahd/2008. To a query by the Bench, the ld.
-3- ITA No.265/Ahd/2008AR replied that decision in Malayala Manorama Co. Ltd.(supra) has been referred to a larger Bench in Dynamic Orthopedics P. Ltd. v. Commissioner of Income-tax, 321 ITR 300 (SC).The learned DR ,on the other hand, relied upon the findings in the impugned order.
5. We have heard both the parties and gone through the facts of the case. The issue before us is as to whether the depreciation of Rs. 55,19,873/- of the earlier years, debited to profit and loss account in the year under consideration, in consequence of change in method of depreciation from straight line method to WDV method, is required to be added back while determining book profits in terms of provisions of sec. 115JA of the Act. The Revenue is of the opinion that it is required to be added back in terms of decision of the Hon'ble Supreme Court in Apollo Tyres,255 ITR 273(SC), the claim being not in accordance with schedule-VI to the Companies Act,1956.On the other hand, the ld. AR relied upon a number of decisions in their support. The first such decision is in Malayala Manorama Co. Ltd.(supra) where in the issue was as to whether the ITO had jurisdiction u/s 115J of the Act to rework net profits by substituting rates prescribed in schedule XIV to the Companies Act,1956. In this case,Hon'ble Kerala High Court held in the light of the decision of the Hon'ble Supreme Court in Surana Steels Pvt. Ltd, v. Deputy CIT [1999] 237 ITR 777, that the depreciation allowable has to be calculated at the rates provided in Schedule XIV to the Companies Act ,1956. Earlier Hon'ble Kerala High Court in the case of CIT v. Apollo Tyres Ltd. [1999] 237 ITR 706 (Ker) had held that for the purpose of section 115J of the Act depreciation has to be computed in accordance with the Companies Act,1956 and not as per the Income-tax Rules. Later, the Hon'ble Apex Court in Apollo Tyres Ltd. vs. CIT,255 ITR 273(SC) held that the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the explanation to section 115J of the Act. Facts in this case were that the assessee-company while determining its net profit for the relevant accounting year, provided for arrears of depreciation in its profit and loss account which -4- ITA No.265/Ahd/2008 according to the Revenue was not in accordance with Parts II and III of Schedule VI to the Companies Act, 1956. Therefore, the Assessing Officer while considering the case of the assessee-company under section 115J of the Income-tax Act recomputed the said profit and loss account of the company so as to exclude the provision made for arrears of depreciation. The ITAT held that the Assessing Officer has no authority to reopen the accounts of a company which is certified by the auditors of the company as having been maintained in accordance with the provisions of the Companies Act and which account has been accepted in the general meeting of the company as well as by the Registrar of Companies. This view of the Tribunal was not accepted by the High Court. Hon'ble Apex Court held that the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the explanation to section 115J of the Act.
5.1 Following the view taken in the aforesaid decision in Apollo Tyres Ltd. (SC) , Hon'ble Supreme Court in Malayala Manorama Co. Ltd.(supra) concluded that the controversy is no longer res integra and rejected the view convassed on behalf of the Revenue in the light of decision of the Hon'ble Kerala High Court in CIT v. Dynamic Orthopedics P. Ltd. [2002] 257 ITR 446 as well as Malayala Manorama and the Madhya Pradesh High Court in the case of CIT v. Vandana Rolling Mills Ltd. [1998] 234 ITR 693 that for the purposes of section 115J of the Act, depreciation could not be calculated as per the provisions of the Income-tax Rules.
5.2 However, in a recent decision dated 16.2.2010 in Dynamic Orthopedics P. Ltd.(supra),Hon'ble Apex Court referred the matter to a larger Bench in the following terms:
"7. In our view, with respect, the judgment of this Court in Malayala Manorama Co. Ltd. vs. CIT (supra) needs reconsideration for the following reasons :
Chapter XII-B of the Act containing "Special provisions relating to certain companies" was introduced in the IT Act, 1961, by the Finance Act, 1987, -5- ITA No.265/Ahd/2008 w.e.f. 1st April, 1988. In fact, s.115J replaced s. 80VVA of the Act. Sec. 115J (as it stood at the relevant time), inter alia, provided that where the total income of a company, as computed under the Act in respect of any accounting year, was less than thirty percent of its book profit, as defined in the Explanation, the total income of the company, chargeable to tax, shall be deemed to be an amount equal to thirty per cent of such book profit. The whole purpose of s. 115J of the Act, therefore, was to take care of the phenomenon of prosperous 'zero tax' companies not paying taxes though they continued to earn profits and declare dividends. Therefore, a MAT was sought to be imposed on 'zero tax' companies. Sec. 115J of the Act imposes tax on a deemed income. Sec. 115J of the Act is a special provision relating only to certain companies. The said section does not make any distinction between public and private limited companies. In our view, s. 115J of the Act legislatively only incorporates provisions of Parts II and III of Sch. VI to 1956 Act. Such incorporation is by a deeming fiction. Hence, we need to read s. 115J(1A) of the Act in the strict sense. If we so read, it is clear that, by legislative incorporation, only Parts II and III of Sch. VI to 1956 Act have been incorporated legislatively into s. 115J of the Act. Therefore, the question of applicability of Parts II and III of Sch. VI to 1956 Act does not arise. If a company is a MAT company, then be it a private limited company or a public limited company, for the purposes of s. 115J of the Act, the assessee- company has to prepare its P&L a/c in accordance with Parts II and III of Sch. VI to 1956 Act alone. If, with respect, the judgment of this Court in Malayala Manorama Co. Ltd. (supra) is to be accepted, then the very purpose of enacting s. 115J of the Act would stand defeated, particularly when the said section does not make any distinction between public and private limited companies. It needs to be reiterated that, once a company falls within the ambit of it being a MAT company, s. 115J of the Act applies and, under that section, such an assessee-company was required to prepare its P&L a/c only in terms of Parts II and III of Sch. VI to 1956 Act. The reason being that rates of depreciation in r. 5 of the IT Rules, 1962, are different from the rates specified in Sch. XIV of 1956 Act. In fact, by the Companies (Amendment) Act, 1988, the linkage between the two has been expressly delinked. Hence, what is incorporated in s. 115J is only Sch. VI and not s. 205 or s. 350 or s.
355. This was the view of the Kerala High Court in the case of CIT vs. Malayala Manorama Co. Ltd. (supra), which has been wrongly reversed by this Court in the case of Malayala Manorama Co. Ltd. vs. CIT (supra).
8. For the aforestated reasons, the Registry is directed to place this civil appeal before the learned Chief Justice for appropriate directions as we are of the view that the matter needs reconsideration by a Larger Bench of this Court."
5.3 The ld. AR also relied upon a decision of the Hon'ble Madras High Court in Tidel Park Ltd.(supra) which was rendered on 13.7.2009 . In this -6- ITA No.265/Ahd/2008 decision also the Hon'ble Madras High Court followed the aforesaid decision of Hon'ble Supreme Court in Apollo Tyres Ltd.(supra). Since this decision was rendered prior to the aforesaid decision of the Hon'ble Apex Court in Dynamic Orthopedics P. Ltd.(supra),apparently the views expressed therein were not considered by the Hon'ble Madras High Court.
5.4 The provisions of sec. 115JA stipulate that the depreciation shall be calculated on the same method and rates while preparing the profit and loss account both for laying before the company at its annual general meeting under the Companies Act as well as for the purpose of section 115JA of the Act. In this connection , the relevant provisions of sec. 115JA of the Act read as under:
"(2) Every assessee, being a company, shall, for the purposes of this section prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956):
Provided that while preparing profit and loss account, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the profit and loss account laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956):
Provided further that where a company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956) which is different from the previous year under the Act, the method and rates for calculation of depreciation shall correspond to the method and rates which have been adopted for calculating the depreciation for such financial year or part of such financial year falling within the relevant previous year."
5.5 In the instant case, the ITAT vide their order dated 4.8.2006 directed the ld. CIT(A) for proper appreciation and consideration of clause (iii) of explanation to sec. 115JA(2) of the Act and thereafter adjudicate the issue in accordance law. After considering the totality of facts and circumstances of the instant case, we find that the ld. CIT(A) did not appreciate the facts and circumstances in the proper perspective nor had the benefit of the views -7- ITA No.265/Ahd/2008 taken in the aforesaid decisions . As observed by the Hon'ble Apex Court in Dynamic Orthopedics P. Ltd.(supra) once a company falls within the ambit of it being a MAT company, s. 115JA of the Act applies and, under that section, such an assessee-company was required to prepare its P&L a/c only in terms of Parts II and III of Sch. VI to 1956 Act. The reason being that rates of depreciation in r. 5 of the IT Rules, 1962, are different from the rates specified in Sch. XIV of 1956 Act. In fact, by the Companies (Amendment) Act, 1988, the linkage between the two has been expressly delinked and what is incorporated in s. 115JA of the Act is only Sch. VI and not s. 205 or s. 350 or s. 355. In these circumstances, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the issue raised in ground no.1 in the appeal to his file for deciding the issue afresh in accordance with law, in the light of our aforesaid observations as also various decisions, including those referred to above and of course, after allowing sufficient opportunity to both the parties. Needless to say that while redeciding the appeal, the learned CIT(A) shall pass a speaking order, keeping in mind, inter alia, the mandate of provisions of sec. 250(6) of the Act. With these observations, ground no. 1 in the appeal is disposed of.
6. No additional ground having been raised before us in terms of residuary ground no.2 in the appeal, accordingly, this ground is dismissed.
7. No other plea or arguments was made before us.
-8- ITA No.265/Ahd/20088. In the result, appeal is allowed, but for statistical purposes.
Order pronounced in Open Court on 29th July, 2011
Sd/- Sd/-
(D.K. TYAGI) (A.N. PAHUJA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Place : Ahmedabad
Dated : 29-07-2011
Copy of the order forwarded to:
1) : Vitrag Dyeing & Printing Mills Private Limited,201, Anand
Market,Ring Road, Surat
2) : ACIT, Circle-4,Surat.
3) : CIT(A)-1,Surat
4) : CIT concerned
5) : DR, ITAT ''. Bench,Ahmedabad
BY ORDER
DR/AR, ITAT, AHMEDABAD
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