Income Tax Appellate Tribunal - Madras
Buttwelded Tools (P.) Ltd. vs Assistant Commissioner Of Income-Tax on 26 August, 1991
Equivalent citations: [1991]39ITD432(MAD)
ORDER
A. Satyanarayana, Accountant Member
1. This appeal filed by the assessee is against the order of the CIT(Appeals) dated 30-3-1989 for the assessment year 1988-89, for which the previous year ended on 31-12-1987.
2. The assessee-company is engaged in the manufacture and sale of buttwelded tools. In the assessment order passed under Section 143(3) on 29-11-1988, the Assessing Officer has computed the tax payable under Section 115J as under: -
Tax payable under Section 115J:
Net profit as per P & L a/c. Rs. 1,17,272
Less: Business loss as per books being lesser
than depn. as per Annexure-II Rs. 31,658
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Rs. 85,614 or
Rs. 85,610
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Net income at 30%... Rs. 25,680.
Income-tax thereon at 55%... Rs. 14,124.
Annexure-II
Losses as per Balance-sheet:
Business loss Depreciation Total
Rs. Rs. Rs.
31-12-1986 31,658 44,622 76,280
31-12-1985 - 33,217 33,217
31-2-1984 - 32,963 32,963
31-12-1983 - 33,677 33,677
Aggrieved by the said levy of tax under Section 115J, the assessee carried the matter in appeal before the CIT(Appeals).
3. Before the CIT (Appeals) the assessee's counsel contended that the Assessing Officer erred in determining the income at Rs. 25,680 for computing the tax payable under Section 115 J inasmuch as what was contemplated by the Explanation to the said section was that the amount of loss to be set off should be as per the provisions of Section 205(1)(b) of the Companies Act, 1956, the object of which was that no dividend should be distributed by the company without depreciation being provided for and that the Assessing Officer has twisted the meaning of the said section and given a wrong interpretation to the provisions of Section 205(1)(b). According to the assessee's counsel no tax was payable under Section 115J. The CIT (Appeals) did not agree with the contentions of the assessee's counsel and upheld the action of the Assessing Officer by observing as under:
Under Explanation 3 to Section 115 J(1) book profit should be reduced by the amount of loss or amount of depreciation which would be required to be set off against the profit of the relevant year as if the provision of Clause B of the first proviso to Sub-section (1) of Section 205 of the Companies Act, 1956, are applicable. Under Section 205(1)(b) if the company incurred any loss in any previous financial year then the amount of the loss or amount equal to the amount provided depreciation for that year or those years whichever is loss 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 both cases after providing for depreciation in accordance with the provisions of Sub-section 2 or against both. By virtue of this clause namely Explanation 2 a deeming provision has been enacted. In other words, book profit has to be reduced by the amount of loss or by the amount of depreciation which would be computed as per the provisions of Clause (b) of proviso to Sub-section (1) of Section 205. The depreciation amount is Rs. 33,205 whereas the business loss is Rs. 31,658. The Asstt. Commissioner has taken the figure of Rs. 31,658 and deducted the same from the net profit as per P&L account. Since the wording used is 'or', the Asstt. Commissioner is free to deduct the loss or depreciation. In my opinion, he strictly acted in accordance with the provisions contained in the Act. I do not find anything wrong in the manner of working and accordingly, the working is confirmed.
Against the said order of the CIT(A) the assessee filed the present appeal before the Tribunal.
4. At the time of hearing, the assessee's counsel filed a paper book of 12 pages and profit and loss accounts for the years ended 31-12-1983 to 31-12-1987 and balance sheets as on 31-12-1983 to 31-12-1987 and a statement showing year wise loss as per the profit and loss accounts, depreciation for the years and the loss/depreciation to be reduced from book profits as per Section 115J. The arguments of the assessee's counsel were to be following effect:
The assessee-company was incorporated under the Companies Act, 1956 on 27-2-1979 as can be seen from the certificate of incorporation placed at page 9 of the paper book. The assessee-company is engaged in the manufacture of cutting tools and specialised welding using a buttwelded machine. While computing the "book profit" for the purposes of Section 115J, according to Clause (iii) of the Explanation to Section 115J(I), the amount of the 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 Clause (b) of the first proviso to Sub-section (1) of Section 2.05 of the Companies Act, 1956 are applicable. According to the said Clause (b) of the first proviso to Section 205(1) of the Companies Act, 1956, where the company has incurred losses in any previous financial years, the amount of the loss or the amount which is equal to the amount provided for depreciation in those previous years, whichever is less, has to be set off against the profits of the company for the current year. The Assessing Officer has noted that for the year ending 31-12-1986 the depreciation claimed by the assessee in the profit and loss account amounted to Rs. 44,622 and that the business loss amounted to Rs. 31,658. He took the lesser amount of these two figures namely Rs. 31,658 and deducted the same from the net profit as per profit and loss account of Rs. 1,17,272 and arrived at the income of Rs. 85,610 for the purposes of Section 115J. But the Assessing Officer should have taken, in each year, least of the figures of net loss as per profit and loss account and depreciation provided for that year. As per the working sheet given, the amounts that ought to have been taken are as under:
Year ending Amount
Rs.
31-12-1983 45,984
31-12-1984 32,964
31-12-1985 33,217
31-12-1986 44,622
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1,56,787
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If the above figure of Rs. 1,56,787 is to be considered, there will not be any book profit as per Explanation to Section 115J. Hence no tax under Section 115J could be levied.
5. The arguments of the Departmental Representative were to the following effect: The CBDT has issued a Circular No. 495 dated 22-9-1987 [168 ITR (Statutes) 87 at page 110] wherein the Section 115J and its application has been explained. In the said Circular, the loss was taken as loss excluding depreciation. The Assessing Officer has adopted the same method of working in Annexure-II of the assessment order for Asst. year 1988-89. So the CIT(Appeals) is justified in upholding the working of the Assessing Officer.
6. I have considered the rival submissions and perused the papers filed before me. According to Clause (iii) of Explanation to Section 115J(1), as it stood in the relevant assessment year 1988-89, the net profit as shown in the profit and loss account for the relevant previous year is to be reduced by the amount of the loss or the amount of depreciation which would be required to be set off as if the provisions of Clause (b) of the first proviso to Sub-section (1) of Section 205 of the Companies Act, 1956 are applicable.
7. According to Clause (b) of the first proviso to Section 205(1) of the Companies Act, 1956, the amount of the loss or an amount which is equal to the amount provided for depreciation, which ever 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. [Emphasis supplied]. The bone of contention-between the assessee and the Revenue is what interpretation is to be given to the word 'loss' occurring in Clause (b) of the first proviso to Section 205(1) of the Companies Act, 1956. According to the Assessing Officer, the loss means business loss excluding depreciation. In other words, business loss (excluding depreciation) and the depreciation are to be considered and the least of the two should be taken. According to the working given by the Assessing Officer in Annexure-II, only in the year ended on 31-12-1986 there was business loss (excluding depreciation) amounting to Rs. 31,658 and depreciation amounted to Rs. 44,622. In the years ending on 31-12-1985, 31-12-1984 and 31-12-1983 there were no business losses, i.e., 0 (zero). Only depreciation amounted to Rs. 33,217, Rs. 32,963 and Rs. 33,677 respectively. According to the Assessing Officer in the years ending on 31-12-1985, 31-12-1984 and 31-12-1983 when the business loss amounted to 0 (zero) and when the depreciation was a positive figure, lesser of the two meant 0 (zero) only and hence nothing should be considered for deduction in respect of those years. That is how he took into consideration the lesser of the two figures namely business loss of Rs. 31,658 and depreciation of Rs. 44,622 for the year ending 31-12-1986. On the other hand, the contention of the assessee's counsel is that the net loss as per profit and loss account, vis-a-vis the depreciation debited in the profit and loss account in each year has to be considered for the purposes of deduction from the net profit of the relevant previous year. According to the working given by the assessee' s counsel, the loss/depreciation to be reduced from the book profits as per Section 115J works out as under: -
Year ended Net loss as per P&L Depredation Loss/Deprn.
Account for the year to be reduced from
the book profits as per
Section 115 J
Rs. Rs. Rs.
31-12-1983 47,746 45,984 45,984
31-12-1984 32,964 45,450 32,964
31-12-1985 33,217 45,005 33,217
31-12-1986 76,280 44,622 44,622
From the working given by the assessee's counsel, it will be seen that the net loss as per profit and loss account is after taking into consideration the debit given in the profit and loss account for depreciation. In other words, it amounts to saying as loss including depreciation. For e. g. in the year ended on 31-12-1983 the loss before considering depreciation amounted to Rs. 1,762. Depreciation of Rs. 45,984 was debited in the profit and loss account. Thus the net loss as per the profit and loss account amounted to Rs. 47,746. In the year ended 31-12-1984 the profit before considering depreciation amounted to Rs. 12,486. Depreciation of Rs. 45,450 was debited in the profit and loss account. Thus the net loss as per the profit and loss account amounted to Rs. 32,964. In the year ended on 31-12-1985 the profit before considering depreciation amounted to Rs. 11,788. Depreciation of Rs. 45, 005 was debited in the profit and loss account. Thus the net loss as per profit and loss account amounted to Rs. 33,217. In the year ended 31-12-1986 the loss before considering depreciation amounted to Rs. 31,658. Depreciation of Rs. 44,622 was debited in the profit and loss account. Thus the net loss as per profit and loss account amounted to Rs. 76,280. According to the interpretation of the Assessing Officer, the correct working should be as under:
Year ended Profit Loss Depreciation Amount to
be deducted
Rs. Rs. Rs. Rs.
31-12-1983 - 1,762 45,984 1,762
31-12-1984 12,486 - 45,450 -
31-12-1985 11,788 - 45,005 -
31-12-1986 - 31,658 44,622 31,658
From the above it will be seen that the Assessing Officer has not properly arrived at the amounts for the year ended 31-12-1983.
8. From a reading of Clause (c) of the first proviso to Section 205(1) of the Companies Act, 1956, the intention of the Government is that the depreciation for the relevant year and the earlier years where there were losses is to be provided for out of the profits of the relevant year and without that, declaration of dividend should not be allowed. Otherwise the prior approval of the Central Government is necessary for declaration of dividend. When such is the situation, if loss is to be considered excluding depreciation such intention cannot be fulfilled. This will be clear from the facts of the case before me in the years ending on 31-12-1983, 31-12-1984 and 31-12-1985. In the year ended 31-12-1983, loss excluding depreciation is only Rs. 1,762 while depreciation is Rs. 45,984. If deduction is given only for Rs. 1,762 being loss, depreciation remains left to be provided for. Similarly in the years ending on 31-12-1984 and 31-12-1985 depreciation remain left to be provided for because there are smaller profits without considering depreciation. So the word 'loss' is to be interpreted as loss including depreciation, and it has to be considered vis-a-vis depreciation and the least of the two should be deducted from profits of the relevant year.
9. According to the latest decision of the Supreme Court in the case of Garden Silk Wvg. Factory v. CIT [1991] 189 ITR 512, unabsorbed depreciation is indeed a part of the 'loss'. In view of this pronouncement, in the working to be done for the purposes of Section 115J loss including depreciation vis-a-vis depreciation has to be considered and the least of the two is to be deducted. Further, the word 'loss' as appearing in Clause (b) of the first proviso to Section 205(1) of the Companies Act, 1956 is susceptible of two interpretations. This is evident from the working given by the Assessing Officer in Annexure-II of the assessment order and working given by the assessee's counsel in the statement filed before me. The Supreme Court in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 had held as under:
If the court finds that the language of a taxing provision is ambiguous or capable of more meanings than one, then the court has to adopt that interpretation which favours the assessee...
Following this dictum laid down by the Supreme Court, I hold that the word 'loss' is to be taken as including depreciation. The Assessing Officer has to take least of the net loss as per profit and loss account and depreciation provided in the profit and loss account in each of the years in which losses were incurred by the assessee. When the working is done in this manner, there will not be any profit liable to tax under Section 115J in the Asst. year under consideration. In these facts and circumstances of the case, I hold that the Assessing Officer was not justified in levying Rs. 14, 124 as tax under Section 115J.
10. In the result, the appeal is allowed.