Income Tax Appellate Tribunal - Madras
Shriram Investments Ltd. vs Assistant Commissioner Of Income-Tax on 31 May, 1996
Equivalent citations: [1996]59ITD570(MAD)
ORDER
1. Of these appeals one is by the Revenue and the others are by the assessee. As some of the issues are common in some of the appeals, a consolidated order is passed for the sake of convenience.
2. ITA No. 1625 (Mds.)/61 : The assessee is a company in which public are substantially interested. The previous year relevant to the assessment year ended on 31-12-1987. The assessee is engaged in the business of leasing and claimed investment allowance of Rs. 4,01,846 in respect of plant and machinery of the value of Rs. 1,607,383 which were installed prior to 31-3-1987 in the premises of the lessees engaged in the business of manufacture or production of articles. The Assessing Officer declined to grant deduction of investment allowance on the premise that the concerned machineries were not used by the assessee itself in the manufacture or production of articles but only by the lessees in their manufacturing business. The assessee carried the matter in appeal. The CIT(A) upheld the claim of the assessee for investment allowance following the ratio laid down by the ITAT in the case of ITO v. First Leasing Co. of India Ltd. [1985] 13 ITD 234 (Mad.) and directed the ITO to grant the said allowance subject to the fulfilment of the other conditions prescribed in section 32A of the Income-tax Act. The Revenue is in appeal.
3. Shri S.V. Subramanian, Standing-counsel, submitted that the decision of the Tribunal in the case of First Leasing Co. of India Ltd. (supra) has since been approved by the jurisdictional High Court, though, however, the Revenue has not accepted the verdict against it. Shri Gopal, the learned counsel for the assessee, submitted that the Tribunal is bound by the decision of the jurisdictional High Court rendered on an identical issue. He also placed reliance on the decision of the Karnataka High Court in the case of CIT v. Shaan Finance (P.) Ltd. [1993] 199 ITR 409/67 Taxman 213. Having regard to submissions made before us, we uphold the order of the CIT(A) for the reason that he has only followed the ratio laid down by the Tribunal in the case of First Leasing Co. of India Ltd. (supra) which has since been approved by the Madras High Court in the case of CIT v. First Leasing Co. of India Ltd. [1995] 216 ITR 455/82 Taxman 536. Accordingly, the Revenue's appeal is dismissed.
4. ITA No. 156(Mds)/95 : This is an appeal by the assessee. The assessment for the assessment year 1991-92 in this case was completed on 30-3-1994 on a total loss of Rs. 1,31,18,287. While completing the assessment brought forward depreciation relatable to the assessment years 1988-89 to 1990-91 which was claimed as a deduction stood allowed. The basis for the assessee making the claim is that in the preceding years, namely 1988-89, 1989-90 and 1990-91 the assessee was assessed to tax on the basis of 30% of the book profits under the provisions of section 115J and hence depreciation admissible as per the Income-tax Rules had not in fact been allowed in arriving at the total income at 30% of the book profits as per accounts. The learned CIT is of the view that he claim put in by the assessee should not have been allowed in the assessment because, as according to him, even for purposes of section 115J there was normal computation of the total income under other provisions of the Income-tax Act in terms of which the depreciation calculated as per Income-tax Rules had been taken into account though tax was levied on the basis of 30% of the book profits. He also noticed that for the assessment years 1989-90 and 1990-91 the CIT(A) had held that in computation of income under the other provisions depreciation as admissible under the Income-tax Rules had been taken into account before applying the provisions of section 115J and, therefore, there was an error in the order of the Assessing Officer for the assessment year 1991-92 in that the Assessing Officer had not taken the WDV of the assets as reduced by the amount of depreciation allowed in the computation for the assessment years 1988-89, 1989-90 and 1990-91. In this view of the matter he held that in the impugned assessment order depreciation had been allowed additionally to the tune of Rs. 45,69,356 and thus the assessment orders suffered from error and prejudice. The next ground on which the CIT invoked his jurisdiction under section 263 was that in the assessment for the assessment year 1991-92 debenture issue expenses to the tune of Rs. 59,08,898 had been claimed and allowed as revenue expenditure under section 37(1) of the Income-tax Act in a revised return which was filed by the assessee on 31-12-1992. This revised return was also a loss return which was filed after the time limit prescribed under section 80 of the Income-tax Act. Therefore, he was of the view that the Assessing Officer should not have entertained the additional claim for deduction of debenture issue expenses in the order cited supra which had ultimately resulted in enhancement of loss later on in the guise of a revised return. Therefore, he held that the assessment order suffered from prejudice and hence he set aside the same to enable the Assessing Officer to correct the two errors mentioned above. The assessee is in appeal before us.
5. One of the issues in this appeal is about the quantification of depreciation to be allowed in the assessment year 1991-92. The definition of "actual cost of an asset" is to be found in section 43(1) and that of "Written Down Value" in section 43(6). The latter defines it to mean (a) in the case of assets acquired in the previous year the actual cost to the assessee, (b) in the case of assets acquired before the previous year the actual cost to the assessee less all depreciation actually allowed to him under this Act or under the 1922 Act, or any Act repealed by that Act, or any executive order issued when the Indian Income-tax Act, 1886 was in force. The effect of definition of written down value is actual cost of the assets. Where the asset was acquired and also used for business in the previous year, such value would be its full actual cost and depreciation for that year would be allowed at the prescribed rate on such cost. In the subsequent year, depreciation would be calculated on the basis of the actual cost less depreciation actually allowed. For the assessment years 1988-89, 1989-90 and 1990-91 the provisions of section 115J were in force. In the case of the assessee, 30% of the book profit was treated as the total income chargeable to tax in those three years since such 30% was higher than the amount of total income computed under the other provisions of the Income-tax Act. (The expression "the other provisions of the Income-tax Act" shall hereinafter be referred to in this order as "normal provisions of the Act"). In computing the income under normal provisions of the Act in relation to the assessment year 1988-89 depreciation was calculated as per Income-tax Rules on the WDV of the assets as at the beginning of the previous year ended 31-12-1987. This computation was made in order to find out whether the income computed thus was less than 30% of the book profits so that the provisions of section 115J might be applied. Similarly, for the assessment year 1989-90 depreciation was computed under the normal provisions of the Act on the WDV of the assets as at the beginning of the previous year 1988-89 in order to find out whether the income thus computed was less than 30% of the book profits for invoking the provisions of section 115J. For the asst. year 1990-91 depreciation was computed under the normal provisions of the Act on the WDV of the assets as at the beginning of the previous year 1989-90 in order to find out whether the income computed thus was less than 30% of the book profits for invoking the provisions of section 115J. The Revenue's case is that as a result of such computations of the WDV of the assets as at the beginning of the previous year 1990-91 would be far less than the WDV of such assets as at the beginning of the previous year ending on 31-12-1987 and it is the former WDV which is relevant for computation of depreciation for the assessment year 1991-92 onwards. The assessee's case is that its WDV as at the beginning of the previous year ended 31-12-1987 remained unaffected through the assessment years 1988-89 to 1990-91. This was on account of the operation of the provisions of section 115J as a result of which the revenue had not in fact allowed depreciation as per Income-tax Rules in arriving at the total income which was charged to tax on the basis of 30% of the book profits under the provisions of section 115J. Thus the issue before us is really what is the WDV of the assets as at the beginning of the previous year 1990-91 (relevant to assessment year 1991-92) on which depreciation is to be allowed.
6. Shri V.D. Gopal contends that as per the Circular issued by the C.B.D.T. (168 ITR St. 10), section 115J was brought to the statute book to ensure that companies, which make huge profits and declare dividends but admit losses only for purposes of income-tax assessment by taking advantage of various incentives granted by the Government, are made to pay tax on some basis that is on the basis of 30% of the book profits. "Book profits" have been defined in section 115J. If 30% of the book profits exceeds the total income computed under the normal provisions of the Act, then such 30% is deemed to be total income chargeable to tax according to sub-section (1) of section 115J. Thus total income chargeable to tax is determined on a basis very different from the normal provisions of the Income-tax Act. The total income determined under the provisions of section 115J cannot be dissected into several heads of income namely salary, profits and gains, capital gains and other sources. It is one indivisible total income which is envisaged in section 115J(1). Therefore, it cannot be said than in arriving at this total income, depreciation had in fact been allowed on the WDV of the assets as at the beginning of the previous year ended 31-12-1987 or as at the beginning of the previous year 1988-89 or as at the beginning of the previous year 1989-90. In other words, the WDV of the assets remained the same in all these years because no part of the depreciation calculated as per I.T. Rules had entered the deemed total income chargeable to tax.
7. Shri Gopal further submitted that depreciation is a charge against the profits. It is only after allowing deduction for depreciation, the profits of the business can be ascertained on legal basis or on commercial basis. This position has been explained by the apex court in a number of cases including Madeva Upendra Sinai v. Union of India [1975] (98 ITR 209) and CIT v. Mother India Refrigeration Industries (P.) Ltd. [1985] (155 ITR 711/23 Taxman 8 at 716). In the light of the ratio laid down by the apex court, it cannot be said that depreciation had in fact been allowed on the assets in the quantification of the total income at 30% of the book profit. Therefore, the WDV as at the beginning of the previous year 1987-88 remained unaffected during the intervening period when the provisions of section 115J were in force.
8. Shri Gopal further submitted that sub-section (2) of section 115J does not have the effect of nullifying the judicial decisions on the question of depreciation. It was enacted only to protect the right of the assessee for unabsorbed depreciation, unabsorbed losses, unabsorbed investment allowance etc. which are to be carried forward in the subsequent year even though the assessee had paid tax on notional income. This provision was necessary because :
(a) as 30% of the book profits was treated as income chargeable to tax under sub-section (1) of section 115J.
and
(b) as the income chargeable tax would always mean or represent or refer to excess of income over unabsorbed depreciation, unabsorbed business loss, unabsorbed investment allowance etc. etc. It could be argued that the assessee had lost its right to carry forward such unabsorbed items. Thus, sub-section (2) of section 115J has a very limited purpose to serve and the purpose was to protect the assessee against the denial of benefit of carry forward and set off of unabsorbed items of depreciation, business loss, investment allowance etc. etc. That does not mean that the amount of depreciation in relation to the relevant previous years (pertaining to the assessment year 1988-89, 1989-90 and 1990-91) had been quantified and allowed in determining the total income chargeable to tax under section 115J(1). Therefore, Shri Gopal vehemently contended that nothing had been allowed by way of depreciation in the relevant previous years, so as to reduce the WDV of the assets for and from the assessment years 1988-89 to 1990-91. He urged that the Revenue cannot have the cake and eat it too by saying that under the first limb of section 115J it had actually allowed depreciation as per the I.T. Rules when the income was computed under the normal provisions of the I.T. Act, though it would abandon such computation under the second limb of section 115J(1) in preference to 30% of the book profits, it being higher than the earlier computation. In such circumstance, it cannot turn round to say that it had in fact allowed depreciation as per the I.T. Rules on the WDV of the asset. No doubt, Revenue can take such a stand provided there was a legislative mandate. For example under section 10A profits and gains from industrial undertakings in free trade zones are not to be included in the total income of the assessee, in respect of five consecutive assessment years falling within a period of eight years beginning with the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things. In such a case the assessee could put forward the claim that nothing was allowed to him by way of depreciation etc. on the assets used in the business of industrial undertaking in the free trade zones for the impugned period of five years and thus claim depreciation in a higher amount in respect of the assets owned and used by it in the years succeeding to the last of the relevant assessment year on the WDV of the assets as at the beginning of the first assessment year in which it started to manufacture to produce articles or things. In order to plug this loophole the Legislature has specifically enacted sub-section (4) under section 10(A) to the effect that in respect of the income which did not form part of the total income for the impugned assessment years, the provisions of section 32 etc. shall apply as if every allowance or deduction referred to therein had been allowed. Similar is the vein of sub-section (7) of section 10B, which deals with profits from newly established business undertakings. Section 10(A) was introduced w.e.f. 1-4-1981. Section 10(B) was introduced w.e.f. 1-4-1988. Thus, the Legislature had consciously made a provision in these two sections to create a fiction that in respect of tax holiday profits, depreciation is deemed to have been allowed. Section 115J was enacted by the Finance Act, 1987 w.e.f. 1-4-1988 but such a deeming provision is totally absent. In other words, the Legislature has not chosen to create a fiction in the nature of section 10A(4) or section 10B(7) when it enacted section 115J. This legislative non-interference in respect of section 115J will lead to the only inference that it did not want to interfere with the claim of depreciation so far as section 115J was concerned.
9. Alternatively Shri Gopal contended that to the extent to which the assessee has been subjected to tax on deemed total income calculated at 30% of the book profits under the provisions of section 115J(1), there has been no adjustment of depreciation which was computed in accordance with the normal provisions of the Act (i.e., depreciation calculated at the rates admissible under the I.T. Rules). The non obstante clause found in section 115J(1) does not have the effect of either taking away the vested right to carry forward the past losses and other allowances such as depreciation etc. once and for all. Such a drastic result should not be allowed to flow from the use of the non obstante clause if it is read in the context of the provision and consistent with the scheme of the enactment. Therefore, it has to be held that depreciation calculated as per the Income-tax Rules has not been adjusted or actually allowed to the extent of deemed total income envisaged in section 115J(1). For this proposition he relied on the decision of the Calcutta Bench of the Tribunal in the case of Singh Alloys & Steel Ltd. v. Dy. CIT [1995] 56 ITD 13.
10. Shri Gopal made a further alternative submission. He referred to the provisions of section 115J(1) and submitted that once it is found that the total income computed under the normal provisions of the I.T. Act is less than 30% of the book profits, it is the latter that will prevail over the former. It is only in the course of the computation of income under the normal provisions of the Act that depreciation is taken into account at the rates prescribed under the I.T. Rules. However, when 30% of the book profits is adopted ultimately as income chargeable to tax, it is based on the amount of depreciation charged in the accounts. Thus there is bound to be difference between the amount of depreciation computed under the normal provisions of the Act (call it I.T. Depreciation) and the amount of depreciation debited in the books of the assessee (call it Book depreciation) in arriving at the book profits, 30% of which was treated as income chargeable to tax. Therefore, to the extent of the difference between I.T. depreciation and Book depreciation, it has to be held that no allowance for depreciation stood actually granted in the assessment. In this view of the matter, Shri Gopal submitted that the difference between these two amounts should be treated as unabsorbed depreciation which has to be carried forward.
11. Shri Gopal referred to the date furnished on page 107 of the paper book No. 1 and illustrated his arguments on the following lines :
A. First argument : Assessment years
1988-89 1989-90 1990-91
Depreciation at the I.T. Rules was Previous years
not allowed in the assessment years 31-12-1987 88-89 89-90
1988-89 to 1990-91 in quantifying the total income of the assessee chargeable to tax on the basis of 30% of the book profits. Hence the WDV as at the beginning of the previous year 1990-91 remains the same as at the beginning of the previous year 1987-88.
B. Second argument :
The total income chargeable to Rs. Rs. Rs. tax at 30% of the book profits 887303 1746917 3194067 Less : Income computed in accordance with normal provisions of the I.T. Act. (-)73335 1496640 (-)553576 -------- ------- --------- Therefore, depreciation not allowed 960638 250333 3747643 ------- ------ ------- C. Third argument : Depreciation as per I.T. Rules Rs. Rs. Rs. (I.T. Depreciation) 4181597 6557323 5994255 Less : Depreciation debited in the book (Book Depreciation) 919128 1823992 2710843 ------- ------- ------- Balance not allowed 3262469 4733331 3283412 ------- ------- -------
Referring to the third illustration, Shri Gopal submitted that the balance amount given in the illustration should be actually more as only 30% of the Book Depreciation has in fact entered the deemed total income.
12. Shri S.V. Subramanian, the learned Sr. Standing Counsel for the assessee contended that none of the propositions advanced by the other side is sustainable in law or on facts. Section 115J is a purposive section to levy tax on zero tax companies in the circumstances specified therein. As a measure of equity this section was inducted into the Statute. Under the first limb of section 115J(1) to total income of the previous years is to be computed in accordance with the normal provisions of the I.T. Act. This means that there will be intra head adjustments under section 70. Under section 71 there will be inter head adjustments namely, set off of loss from one head against another head. Under section 72 the unabsorbed business loss of earlier years are to be adjusted against the profits and gains of any business or profession provided the business or profession for which loss was originally computed continues to be carried on. Unabsorbed business loss will get priority for adjustment over unabsorbed depreciation and unabsorbed investment allowance. There are also provisions regarding carry forward and set off of capital loss, speculation loss etc. etc. These provisions are given effect to in arriving at the gross total income from which deduction under Chapter VI is given in the order to arrive at the total income. Thus there has been a regular computation of total income under the normal provisions of the I.T. Act determining the amount to be taxed or the amount to be carried forward. However, if such total income is found to be less than 30% of the book profits, then 30% of the book profits is deemed as income chargeable to tax. Thus a fiction is enacted in the second limb of section 115J(1), but the fiction is only for the limited purpose of levying tax and for no other purpose. Its effect, in the context of levy of tax, is limited to the extent of "increasing the total income as computed in accordance with regular provisions of the I.T. Act by an amount which is equal to the difference between the computed figure and 30% of the book profits." Viewed in this light there should not be any difficulty in holding that depreciation had in fact been allowed as per I.T. Rules, and that due notice has been taken of the unabsorbed items of depreciation, losses and other allowances which are to be carried forward and set off. It is one thing to say this and it is quite a different to say that tax was levied on a different basis - notional basis. Therefore, it cannot be said that depreciation has not been allowed to the assessee.
13. Shri S.V. Subramanian referred to the second argument of the assessee that there has been no granting of depreciation at least in a sum represented by the difference between the total income chargeable to tax at 30% of the book profits and income computed in accordance with the normal provisions of the I.T. Act. He submitted that the assessee would want the Tribunal to believe that to the extent of this difference quantified in a sum of Rs. 91,60,638, Rs. 2,50,339 and Rs. 37,47,643 respectively for the assessment years 1988-89, 1989-90 and 1999-91 depreciation had not been allowed to the assessee. This amounts to going back on the computation not authorised under any of the provisions of the Income-tax Act and therefore, such a plea should not be accepted.
He referred to the third contention of the assessee namely that no depreciation had been allowed to it to the extent of difference between the amount of depreciation as per Income-tax Rules and the amount of depreciation debited in the books of account and submitted that these arguments are also to be rejected, because the adoption of 30% of the book profits as income chargeable to tax was only by means of a fiction for the limited purpose of levying tax and that fiction cannot nullify the effect of the computation of income under the normal provisions of the Act. Viewed in this background there should not be any difficulty in understanding the scope and the effect of sub-section (2) of section 115J. This sub-section also opens with a non obstante clause. It over-rides the provisions of sub-section (1) in so far as the amount to be determined in respect of the unabsorbed items to be carried forward. This is possible only if the provisions of the I.T. Act sans the provisions of section 115J(1) is taken into account. In other words, sub-section (1) over-rides the normal computation provisions and provides a fictional basis for arriving at the taxable income. Sub-section (2) over-rides sub-section (1) and therefore, the over-riding effect of sub-section (1) and sub-section on the normal computation provision is nullified by sub-section (2). This is the effect of the non obstante clause found in sub-section (1) and sub-section (2). The result will be that double negative is one positive and therefore, normal computation provisions of the I.T. Act (sans the provisions of section 115J) will spring into light in order to determine the amounts to be carried forward. He contended that no word, no sentence an no provision in the statute should be considered as surplusage, and all the provisions of the Act should be read together and harmonised. Tested on this principle, Shri Subramanian submitted that none of the contentions advanced by the assessee's counsel can bear scrutiny.
14. We have thus heard the rival submissions. The assessee has filed before us four paper books. Paper Book No. I contains among other things the assessment orders for the assessment years 1988-89 to 1993-94 and connected papers. Paper Book No. II contains : (1) Comintax Consultants-opinion on section 115J, (2) copy of the Tribunal order in the case of C.C.V. Krishnan, [IT Appeal No. 2743 (Mad.) of 1993 dated 7-4-1995], (3) copy of Supreme Court judgment in the case of Madeva Upendra Sinai (supra), (4) copy of the Madras High Court judgment dated 12-9-1995 in the case of Sundaram Finance Ltd. Madras and Ors., (5) Notes on claim for higher depreciation @ 40% in respect of lorries given on hire submitted by the assessee before the CIT(A) II, Madras, (6) copy of the order of the Tribunal D-Bench, Calcutta in the case of Singh Alloys & Steel Ltd. (supra), (7) copy of the Ahmedabad Bench of the Tribunal's order in the case of ITO v. Kohinoor Flour Mills Ltd. [1991] 37 ITD 259 and (8) copy of the Madras Bench-B of the Tribunal's order in the case of Fab Exports (P.) Ltd. v. Asstt. CIT in [IT Appeal No. 2905 (Mad.) of 1993 dated 25-7-1995.] Paper Book No. III contains depreciation table, extra depreciation/allowance, table of return of income, illustration I and II, original return of income (Assessment year 1991-92) and revised return of income for the assessment year 1991-92. Paper Book No. IV contains the written submissions. Yet there is one sheet of paper detailing the depreciation as per account books and depreciation as per I.T. Rules. We have gone through the materials submitted before us. There can be quarrel over the proposition advanced by the learned Sr. Standing Counsel that none of the provisions of the statute can be viewed as a surplusage. There can be no two views on the proposition that the statute must be read as a whole in order to cull out the intention of the Legislature in the case of ambiguity and the purpose of interpretation is to harmonise the different provisions of the statute with the object of the statute kept in view. In the backdrop of these accepted principles, we proceed to examine the issue before us.
15. Section 115J was inserted by Finance Act, 1987 w.e.f. 1-4-1988. It was withdrawn from the Statute Book by the Finance Act, 1990 w.e.f. 1-4-1991. Thus the impugned section was in force for the assessment years 1988-89, 1989-90 and 1990-91 only. Section 115J(1) reads as under :
"Special provisions relating to certain companies.
115J.(1) Notwithstanding anything contained in any other provisions of this Act, where in the case of an assessee being a company (other than a company engaged in the business of generation or distribution of electricity) the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1988 but before the 1st day of April, 1991 (hereafter in this section referred to as the relevant previous year), is less than thirty per cent of its book profit, the total income of such assessee chargeable to apex for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit.
(1A) 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 of the Companies Act, 1956 (1 of 1956).
Explanation. - For the purposes of this section, 'book profit' means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (1A) as increased by -
(a) to (ha) not reproduced as not relevant.
If any amount referred to in clauses (a) to (f) is debited or, as the case may be, the amount referred to in clauses (g) and (h) is not credited to the profit and loss account and as reduced by....
... (i) to (iv) not reproduced as not relevant."
Sub-section (1) has two limbs : Under the first limb, the total income is computed in accordance with the other provisions of the I.T. Act (which we will call as 'normal provisions').
If such total income is found to be less than 30% of the book profits, then under the second limb it has been provided that the total income chargeable to tax shall be deemed to be in a sum equal to 30% of the book profits. By reading together both the limbs of section 115J(1) it would be clear that a fiction is created in respect of the total income chargeable to tax. Such total income is arrived at on a basis very different from the normal computation of total income and the computation of book profits itself is subject to certain adjustments for increase and decrease. But the learned Standing Counsel would like to read section 115J(1) in the following vein :
"increase the total income computed under the other provisions of the Income-tax Act by an amount equal to the difference between the amount of total income thus computed and 30% of the book profit."
In effect he contends that under section 115J(1) an addition is to be made to the total income which was computed under the normal provisions of the Income-tax Act such that, that total income is deemed to be equal to 30% of the book profits. We do not accept the view advanced by the Revenue. In our considered opinion there is nothing in the language of section 115J(1) to support the method or manner of ascertainment of deemed total income as canvassed by the learned Standing Counsel. The mere fact that arithmetically the end-product will result in the same amount of deemed total income cannot be the ground for reading the section in a manner different from the language employed in that section. There can be no room for intendment when the language is lain and clear. In our opinion, the amount of total income computed under the normal provisions of the Income-tax Act yields to an amount equal to 30% of the book profits if such 30% is higher than the amount of total income initially computed. In other words, the first limb of section 115J(1) yields to its second limb in the specified circumstances and, therefore, there is substantial force in the contention of Shri Gopal that the total income computed under the normal provisions of the Income-tax Act can no longer survive once deemed total income is ascertained for purposes of tax.
16. The learned Standing Counsel relies on the decision of the Bangalore Bench of the Tribunal in the case of Dy. CIT Karnataka State Small Industries Development Corpn. Ltd. [1994] 49 ITD 521. The facts of the case before the Bangalore Bench were as follows :
"For the assessment year 1989-90, the assessee-companies were subjected to imposition of tax on 30 per cent of the book profits in accordance with the provisions of section 115J(1). The question arose as to what should be the amounts of WDVs to be taken into consideration in the next year and what amounts of unabsorbed loss, unabsorbed depreciation, unabsorbed investment allowance etc. were to be carried forward. The Commissioner (Appeals) was of the view that inasmuch as no depreciation was actually allowed during the years relevant to the present appeals in view of the assessments having been made under the special provisions of section 115J(1), there would be no change in the figures of the WDVs as brought forward to this year and the same figure would be carried forward to the next year. He further held that the amounts of loss, unabsorbed depreciation, unabsorbed investment allowance, etc., as brought forward to the years under appeal from the preceding years, should be carried forward in an exact manner to the next year, and those pertaining to the years under appeal should not be taken into consideration."
The Tribunal held as follows :
"A plain reading of section 115(2) shows that in the matter of determination of the amounts in relation to the relevant previous year, i.e., the current year, to be carried forward to the subsequent year by way of business loss, unabsorbed depreciation, unabsorbed investment allowance and unabsorbed 79J(3), the provisions of sub-section (1) of section 115J shall be considered to be virtually non-existing. In other words, the determination of these losses and allowances will have to be done in the normal way as if no order under section 115J(1) was passed....
** ** ** The effect of not considering the provisions of section 115J(1) would be to go back to the determination of the total income by allowing the current depreciation as well as setting off the unabsorbed depreciation etc. of the earlier years brought forward to the current year. After the set off, the resultant figures only are required to be carried forward to the next year. This is the plain interpretation of the language used in section 115J(2) and there does not seem to be any ambiguity therein.
** ** ** When, however, it has clearly been mentioned in section 115J(2) that nothing contained in sub-section (1) shall affect the determination of amounts etc. it would amount to actual allowance of depreciation and other allowances against the gross income of the assessee in the computation of total income according to the regular process. The assessment of the total income in this process has necessarily got to be done and is also done and the only modifying step is that instead of working out tax on the said total income, tax is worked out on a different amount. This will be clearer in a case where the gross total income of the assessee before allowing current year's and/or brought forward unabsorbed depreciation of earlier years is a positive figure and much higher than 30% of the adjusted book profits. But for adjustment and setting off of the current year's depreciation as well as the brought forward unabsorbed depreciation of earlier years, the assessee would have certainly been liable to suffer tax on this higher amount of gross income. Allowance of the current year's depreciation accompanied with absorption of the brought forward allowances of the earlier years, if required, naturally saves the assessee from that calamity and reduces his total income below the figure of 30% of the adjusted book profit. It would, therefore, not at all be correct to say that in such a case the current year's depreciation as well as allowances brought forward from earlier years have not actually been allowed or adjusted in determining the total income of the assessee."
** ** ** Hence, both the brought forward WDV as at the beginning of the current year as well as the brought-forward business losses, unabsorbed depreciation etc. were required to be adjusted first by way of allowing depreciation in the current year and by way of adjustment/set off of the said business losses, depreciation, etc. against the current year's gross income computed in accordance with regular provisions of the Act, and thereafter the resultant amounts of WDVs and business losses, unabsorbed depreciation, unabsorbed investment allowance etc. would have to be carried forward to the subsequent year in accordance with the relevant provisions of law. In determining these issues, it would have to be considered as if no assessment of 30 per cent of the book profits of the assessee had been made under section 115J(1)."
17. We have carefully gone through the decision cited before us. Sub-section (2) of section 115J reads as under :
"(2) Nothing contained in sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried to the subsequent year or years under the provisions of sub-section (2) of section 32 or sub-section (3) of section 32A, or clause (ii) of sub-section (1) of section 72 or section 73 or section 74 or sub-section (3) of section 74A or sub-section (3) of section 80J."
It would appear that the Bangalore Bench of the Tribunal, while emphasising that the provisions of section 115J(1) should be held to be non-existing in so far as determination of carry forward of unabsorbed items is concerned, had ultimately taken recourse to the first limb of section 115J(1), namely the computation of total income in accordance with the other provisions of the Income-tax Act in quantifying the amount of depreciation to be allowed and carried forward. To our mind it seems that the prohibition (assuming it to be a prohibition) contained in sub-section (2) of section 115J would apply in equal force both to the first limb of section 115J(1) namely computation of total income in accordance with the other provisions of the Act and the second limb of section 115J(1) namely computation of 30% of the book profits read with the Explanation thereto. The prohibition is total and it cannot be viewed peacemeal. Hence, with very great respect we are unable to follow the ratio laid down by the Bangalore Bench of the Tribunal on the question of quantum of depreciation actually allowed during the years under appeal.
17A. In our opinion, the scope and ambit of section 115J(2) is only to protect the right of the assessee to have unabsorbed items [of (a) depreciation, (b) business losses, (c) losses on capital account, and (d) investment allowance etc.] to be carried forward through the assessment years to which the provisions of section 115J(1) were applicable. The right vested in the assessee in respect of such unabsorbed items brought forward from the years anterior to the commencement of the operation of section 115J(1) are thus protected in sub-section (2). Further, sub-section (2) does not use the expression "carried forward and set off" but stops only with the expression "carried forward". Such being the purpose and scope of section 115J(2), it is not material to decide the issue of the quantum of depreciation actually allowed during the years when the provisions of section 115J were in force. Thus with great respects we are unable to concur with the decision of Bangalore Bench.
18. In our opinion, in order to resolve the issue whether any depreciation had in fact been allowed on the assets owned and held by the assessee for the purpose of the business in the relevant previous years during which the provisions of section 115J were in force, one has to look at the definition of actual cost of an asset as found in section 43(1) and that of WDV in section 43(6) vis-a-vis the definition of total income under section 2(45) of the I.T. Act. The law defines actual cost to mean (a) in the case of assets acquired in the previous year the actual cost to the assessee, (b) in the case of assets acquired before the previous year, the actual cost to the assessee less depreciation allowed to him under this Act. On the issue of depreciation actually allowed the the Supreme Court in Madeva Upendra Sinai's case (supra) by the majority judgment held 'that the key word in clause (b) of section 43(6) of the Income-tax Act, 1961 is "actually". It is the antithesis of that which is merely speculative, theoretical or imaginary. "Actually" contra indicates a deeming conception of the word actual which it qualifies. The connotation of the phrase "actually allowed" is thus limited to depreciation actually taken into account or granted and given effect to, that is deducted by the ITO against incomings of the business in computing the taxable income of the assessee. It cannot be stretched to mean notionally allowed or merely allowable on a notional basis. Even in the case of assets acquired before the previous year where in the past no depreciation was computed, or actually allowed or carried forward for no fault of the assessee, the WDV may also under section 43(6)(v) be the actual cost of the assets to the assessee'. Applying the ratio laid down by the Supreme Court we have no hesitation in holding that it is only the amount of depreciation actually debited in the books of account that had in fact been allowed in the assessment for the assessment years 1988-89 to 1990-91 and not any other sum.
19. This our view is in accord with the definition of "total income" as found in section 2(45)) of the I.T. Act :
"Sec. 2(45) : 'total income' means the total amount of income referred to in section 5, computed in the manner laid down in this Act."
The expression "computed in the manner laid down in this Act" will take in its sweep not merely other provisions of the Act by which total income is normally computed in respect of the years in which section 115J is not applicable but also the provisions of section 115J(1) itself in the years to which such provisions (115J) were applicable. Admittedly in the case before us it was only 30% of the book profit that was treated as total income chargeable to tax. In arriving at such total income chargeable to tax only "book depreciation" had been allowed but not the amount of depreciation admissible to the assessee as per Income-tax Rules. Therefore, the third argument of Shri Gopal that to the extent of the difference between the amount of depreciation computed in accordance with the Income-tax Rules and amount of depreciation actually debited in the books of account, the assessee has not in fact been allowed any depreciation, is plainly supported in terms of the definition of total income chargeable to tax as given in section 2(45) of the Act read with the ratio laid down by the apex court cited supra. In this view of the matter we uphold the assessee's third argument and determine the amount of depreciation not allowed in the computation of total income chargeable to tax as follows :
(figures are subject to verification by the A.O.) Assessment years 1988-89 1989-90 1990-91
------- ------- -------
Previous years 31-12-87 88-89 89-90
--------- --------- ---------
(a) Depreciation as per 41,81,597 65,57,323 59,94,255
I.T. Rules (I.T. depreciation)
(b) Less : Depreciation debited
in the books (book
depreciation) 9,19,128 18,23,992 27,10,843
--------- --------- ---------
(c) Balance not allowed in the
respective assessments 32,62,469 47,33,331 32,83,412
--------- --------- ---------
In this view of the matter we hold that the WDV of the assets as at the beginning of the previous year relevant to the assessment year 1991-92 will get reduced only to the extent of the amount of depreciation debited in the books of account (which had in fact been allowed in arriving at the total income chargeable to tax) in the relevant previous years, namely Rs. 54,53,963 (Rs. 9,19,128 + Rs. 18,23,992 + Rs. 27,10, 843).
20. The learned Standing Counsel vehemently contended that such a view is not tenable in terms of section 115J and emphasised that it was not the legislative intent to grant relief to the assessee by way depreciation etc. after arriving at the deemed total income under section depreciation etc. after arriving at the deemed total income under section 115J of the I.T. Act. In our considered opinion, there is nothing in the language of either section 115J(1) or (2) or section 2(45) of the Income-tax Act to support the line of argument of the learned Standing Counsel. On the other hand, the view we have taken on the quantum of depreciation will harmonise all the relevant provisions. If the Legislature wanted that the assessee should lose every deduction or benefit once the total income is ascertained in terms of section 115J(1), it would have clearly made its intention manifest in no uncertain terms. For example, under section 10A of the Income-tax Act profits and gains from industrial undertakings in free trade zones are not to be included in the total income of the assessee for a specific period. In such a case the assessee could put forward the claim that nothing was allowed to him by way of depreciation on the assets used in the business of industrial undertaking in the free trade zones for the impugned period of five years and thus claim depreciation in a higher amount in respect of the assets owned and used by it in the year succeeding to the last of the relevant assessment year on the WDV of the assets as at the beginning of the first assessment year in which the assessee started manufacture or production of article or thing. Being aware of such a contention, the Legislature has specifically enacted sub-section (2) under section 10A to the effect that in respect of the income which did not form part of the total income in the impugned assessment years, the provisions of section 32 etc. shall apply as if every allowance or deduction referred to therein had been allowed. Similar is the vein of sub-section (7) of section 10B which deals with profits from newly established business undertakings. Thus the Legislative had consciously made a provision under these two sections to create a fiction that in respect of tax holiday profits depreciation is deemed to have been allowed. In section 115J, which was enacted by the Finance Act, 1987 w.e.f. 1-4-1988 the Legislature has not chosen to create a fiction that in the nature of section 10A(4) or section 10B(7) when it enacted section 115J. This Legislature non-interference in respect of section 115J will lead only to the inference that it did not want to interfere with the claim of depreciation to the extent to which it was not allowed in computing deemed total income chargeable to tax. Incidentally it may be pointed out that section 10(4) was introduced w.e.f. 1-4-1988 and section 10B was introduced w.e.f. 1-4-1988 and section 115J was also introduced w.e.f. 1-4-1988. The deeming provisions contained in sub-section (4) of section 10A or sub-section (7) of section 10B are not to be found in section 115J. For all these reasons we uphold the third contention of Shri Gopal that only the amount of depreciation to the extent it was debited in the books of account was in fact allowed in computing the total income chargeable to tax in terms of section 115J of the I.T. Act.
21. Shri Gopal had made a plea before us that the amount of depreciation debited in the books had been allowed partly to the extent of 30% of such depreciation and thus would make a refinement of his third argument illustrated in para 11(c). We reject this plea. A sum equal to 30% of the book profit as given in the Explanation to section 115J(1) is deemed as total income chargeable to tax. The total income thus computed is one indivisible total income. The expression "the sum equal to 30%" found in the section is a pointer to this fact. Therefore, it cannot be held that only 30% of the book depreciation had been allowed. The percentage prescribed has only a limited role to play in the context and setting of the section.
22. This our conclusion will necessarily lead to the rejection of the first contention of Shri Gopal that nothing had been allowed to him by way of depreciation for and from the previous years 1987 to 1989-90 and therefore the WDV of the assets as at the beginning of the previous year 1991-92 remains the same as at the beginning of previous year ended 31-12-1987.
23. Shri Gopal's second alternate contention is that to the extent of the difference between the total income chargeable to tax at 30% of the book profits and the income computed in accordance with the normal provisions of the Income-tax Act, no depreciation had in fact been allowed in the assessment. This argument is illustrated at para-11, item B. He relies on the decision of the Calcutta Bench of the Tribunal in the case of Singh Alloys & Steel Ltd. (supra). In our considered opinion, the facts of the case before the Calcutta Bench are different from the facts of the case before us. In that case the assessee had unabsorbed depreciation and losses pertaining to the assessment years 1983-84, 1986-87 and 1987-88 in sum of Rs. 29,28,146 which were brought forward to the assessment year 1989-90 and the question was whether in a computation of total income chargeable to tax under section 115J, the assessee had lost its rights to have such items to be carried forward in the subsequent year or years and, if not, to what extent the right was preserved. Thus that facts are materially different in that case and we reject the second contention of Shri Gopal illustrated in para 11 item B.
24. The second issue in this appeal is against the order of the CIT under section 263 directing the ITO to disallow debenture issue expenses of Rs. 59,08,898 on the premise that the Assessing Officer should not have allowed the claim made in the revised return of income filed by the assessee on 31-12-1992. According to the CIT, the revised return was filed after the time limit prescribed under section 80 of the I.T. Act and the Assessing Officer erred in entertaining the claim which has resulted in enhancement of the loss originally admitted in the return. The assessee is aggrieved.
25. The appellant had a profit of Rs. 1,44,22,795. After making adjustments the business income was in a sum of Rs. 1,77,82,762. However, the assessee had claimed depreciation in a sum of Rs. 2,58,01,069. This resulted in a depreciation loss of Rs. 80,18,307 as admitted in the original return of income filed on 31-12-1994. Though the returned figure was a loss, the loss was entirely due to the claim for depreciation. Subsequently, on 31-12-1992 the business income which was originally admitted in a sum of Rs. 1,77,82,762 was reduced to Rs. 1,18,73,863 and this was due to the claim made by the assessee in respect of the debenture issue expenses in an extent of Rs. 59,08,898. This apart the assessee revised its claim of depreciation in a sum of Rs. 3,03,64,940 as against the original figure of Rs. 2,58,01,069. As result the revised return filed on 31-12-1992 showed a loss of Rs. 1,81,18,287. From the facts narrated it will be clear that the loss returned was not business loss simpliciter either in the original return filed on 31-12-1991 or in the revised return filed on 31-12-1992. Therefore, prima facie the provisions of section 80 regarding the submission of return for loss is not applicable to the case of the assessee either in respect of the original return filed on 31-12-1991 or in respect of the revised return filed on 31-12-1992 because the embargo contained in section 80 with respect to the return of loss will be applicable only respect of the items to be carried forward and set off under sub-section (1) of section 72 or sub-section (2) of section 73 or sub-section (1) or (3) of section 84 or sub-section (3) of section 74A. Obviously in the case of the assessee the loss was introduced in the case of original return as well as the revised return only by its claim for deduction of depreciation in the manner it liked. The loss was not due to business loss in contradistinction to depreciation loss. In both the events, that is when the assessee filed its original returns or when it filed its revised return, there was income from business and not loss from business. In the first event it was Rs. 1,77,82,762 and in the second event it was Rs. 1,18,73,863 (both positive figures). The difference was only due to the claim for debenture expenses in a sum of Rs. 59,08,898 and even after admitting this claim the resultant figure of business income was only a positive figure but not a negative figure. Therefore, the provisions of section 80 is not applicable to the facts of the assessee's case. It is not the case of the CIT that the assessee is not eligible to claim the sum of Rs. 59,08,898 as revenue expenses. His case was only that such a claim should not have been entertained in the revised return. From the facts narrated above and the reasons found therein, we are unable to uphold the order of the CIT(A) on this score because in our considered opinion section 80, which deals with the right to carry forward and set off the loss is confined to (a) speculation business loss, (b) non-speculation business loss; (c) loss under the head Capital gains, and (d) loss in horse racing but not to loss due to claim for depreciation. Further, the debenture expenses on the face of it are allowable deduction in the ratio of the decision of the Supreme Court in India Cements Ltd. v. CIT [1966] 60 ITR 52.
26. In the result, the appeal of the assessee against the disallowance of the depreciation is partly allowed and against disallowance of debenture issue expenses is allowed. Thus the order of the CIT stands modified.
27. ITA No. 1760(Mds)/95 - This is an appeal pertaining to the assessment year 1991-92 against the order of the CIT(A) in confirming the assessment order consequent on the revisional order passed by the Commissioner of Income-tax under section 263. The CIT(A) has held that as the impugned order by the Assessing Officer was only as a result of order under section 263. He would not interfere with the same. The assessee is in appeal. We have heard the rival submissions. The assessee had come on appeal against the order of the CIT passed under section 263 in its appeal in ITA No. 156(Mds)/95 and in the preceding paragraphs we have modified the order passed under section 263 and partly allowed the claim of the assessee for deduction of debenture issue expense. In the circumstances, the appeal of the assessee in ITA No. 1760(Mds)/95 is partly allowed for statistical purposes.
28. ITA No. 1761(Mds)/95 - There are two issues in this appeal : One is the quantum of depreciation to be allowed for the assessment year 1992-93 which would turn on the WDV of the asset as at the beginning of the previous year 1991-92. In keeping with his earlier stand, the learned Assessing Officer was of the opinion that during the assessment years 1988-89 to 1990-91, though the total income was computed under section 115J(1) on a basis different from the normal provisions of the I.T. Act, he had in fact allowed to the assessee depreciation admissible to it as per Income-tax Rules and, therefore, the WDV of the asset would be far less than that claimed by the assessee. In this view of the matter, he did not accede to request of the assessee for higher amount of depreciation for the assessment year 1992-93. The CIT(A) in keeping with his earlier orders upheld the view of the Assessing Officer. The assessee is in second appeal. The question of depreciation that should be considered as having been allowed to the assessee has been discussed threadbare and determined by us in the appeal of the assessee for the assessment year 1991-92 in ITA No. 156(Mds)/95. Accordingly, we direct the Assessing Officer to recompute the WDV of the assets giving effect to our findings in the assessment year 1991-92 and grant depreciation to the assessee on the basis of the WDV thus arrived at. In other words, the appeal of the assessee is partly allowed.
29. Another issue in this appeal is about the rate of depreciation admissible to the assessee on the motor lorries owned by it but leased to the truck operators. The assessee's claim was at the rate of 40% on the leased out assets. The Assessing Officer held that the assessee was only a lessor and the assets used only by the lessees for hire and, therefore, depreciation at the rate of 25% alone was admissible to the assessee on the leased out assets. Before the CIT(A) the assessee relied on the following decisions : South India Viscose Ltd. v. CIT [1982] 135 ITR 206/10 Taxman 295, Shaan Finance (P.) Ltd.'s case (supra), Dr. K.R. Jayachandran v. ITO [1994] 75 Taxman 163 (Coch.), First Leasing Co. of India Ltd. v. ITO [1983] 3 ITD 808 (Mad.) and ITAT Madras Bench B decision dated 7-4-1995 in ITA No. 2743(Mds)/93 and 1942(Mds)/94. The learned CIT(A) preferred to follow the following decisions to reject the claim of the assessee : Kohinoor Flour Mills Ltd.'s case (supra); CIT v. Manjeet Stone Co. [1991] 190 ITR 183/55 Taxman 365 (Raj.) and CIT v. Sardar Stones [1995] 215 ITR 350 (Raj.). The assessee is in second appeal. We have heard the rival submissions and perused the records. The cases relied on by the CIT(A) are distinguishable on facts from the case of the assessee. In the case of Kohinoor Flour Mills Ltd. (supra) the assessee was engaged in the business of running flour mill and the trucks were used for the purpose of manufacturing activities as well as for being run on hire. The Tribunal in that case held that since running on the hire was not a distinct and separate activity, it was not eligible for higher depreciation.
30. In Manjeet Stone Co.'s case (supra) the lorries were used for the business of carrying stones from mines to his sales depot and the court held that even though the lorries were registered as public carries, as they were not used in the business of running on hire, it was not eligible for higher depreciation.
31. In the case of Sardar Stones (supra) the court held that where the trucks were used in the assessee's own business of carrying stones from mines to sales depot and also occasional use for hiring, it cannot be said that the assessee was running the vehicles on hire and, therefore, the claim for higher rate of depreciation was rejected by the Rajasthan High Court.
32. On the other hand, the case of the assessee is totally different. The assessee's business is that of leasing. The expression 'leasing' will include letting out the assets on hire. The ownership of the assets rests with the lessor-assessee notwithstanding the leasing out of the same. The lessee has also used the assets leased out to them only on hire. These are undisputed facts in this case. There is no requirement in section 32 or in the rules thereunder that the assets owned by the lessor should be used by the lessor himself on hire. In the case of ITO v. First Leasing Co. of India Ltd. (13 ITD 234) the Tribunal for reasons stated in its order had upheld the claim of the leasing company for higher rate of depreciation on the assets owned by it and leased out to different persons. The decision of the Tribunal has since been upheld by the Madras High Court in CIT v. First Leasing Co. of India Ltd. (216 ITR 455). For all these reasons we set aside the order of the CIT(A) and uphold the claim of the assessee for higher rate of depreciation.
33. ITA No. 2100(Mds)/95 - This is an appeal arising from an order made under section 154 of the I.T. Act in relation to the assessment year 1993-94. The rectification arose for the assessment year 1993-94 as a result of the order passed by the CIT under section 263 of the I.T. Act in relation to the assessment year 1991-92. The learned CIT disallowed the amount of depreciation originally allowed in the assessment for the assessment year 1991-92. That order had come in appeal before us ITA No. 156(Mds)/95. We had granted relief to the assessee in relation to the order under section 263. Accordingly, the quantum of depreciation to be allowed for that year and also to the subsequent year would require modification. In this view of the matter, we set aside the order of the CIT(A) for the assessment year 1993-94 and direct the Assessing Officer to modify the quantum of depreciation by reworking the WDV for the earlier years. In this view of the matter, the appeal is partly allowed.
34. This leaves us to consider the appeals for the assessment years 1989-90 and 1990-91 (ITA Nos. 1376/Mds/93 and 1987/Mds/93). This is the second and third year of application of section 115J to the assessment. For the assessment year 1989-90 the assessee's previous year consisted of 18 months beginning on 1-1-1988 and ending on 31-3-1989. The appellant has claimed depreciation on fixed assets on the basis of the WDV as on 1-1-1987 on the ground that the assessment for the assessment year 1988-89 relating to the previous year ending on 31-12-1987 had been completed in accordance with the provisions of section 115J and that no depreciation had actually been allowed for that year. However, the Assessing Officer quantified the depreciation for the assessment year 1989-90 on the basis of the WDV as on 1-1-1988. In other words, according to him even during the operation of section 115J depreciation at the rates applicable as per the Income-tax Rules had been considered in the computation of the total income under the other provisions of the Income-tax Act. In this view of the matter, he declined to quantify depreciation as prayed for by the assessee. For the assessment year 1990-91 identical issue arises on the quantum of depreciation allowed to the assessee which in turn depended upon the WDV of the assets as at the beginning of the previous year relevant to the assessment year 1990-91. The assessee did not succeed before the CIT(A) for the reasons stated in his order and the assessee is in further appeal before us. The issue for these two years is similar to the one that has been discussed in ITA No. 156(Mds)/95 in relation to the assessment year 1991-92. In keeping with the ratio laid down therein, we hold that only the amount of depreciation that had been recorded in the books of account will enter the total income of the assessee computed under the provisions of section 115J in respect of the assessment years 1989-90 and 1990-91. Therefore, the WDV of the assets should be reworked on the basis of the depreciation that had been debited in the accounts which alone has been actually allowed to the assessee in the relevant previous years. We thus modify the order of the CIT(A) and direct the Assessing Officer to rework the WDV of the assets for the relevant previous years and allow depreciation on the amount recorded in the books of account. The appeals are partly allowed.
35. In the result, ITA No. 1625(Mds)/91 is dismissed, ITA Nos. 1376, 1987(Mds)/93, 156, 1761 and 2100(Mds)/95 are partly allowed and ITA No. 1760(Mds)/95 is partly allowed for statistical purposes.