Income Tax Appellate Tribunal - Cochin
Psi Data Systems Ltd. vs Deputy Commissioner Of Income Tax ... on 23 June, 1998
Equivalent citations: [1999]69ITD7(COCH)
ORDER
M.M. Cherian, A.M.
1. This is an appeal by the assessee, M/s. P.S.I. Data Systems Ltd., Bangalore against the order passed by the CIT(A), Cochin in the income-tax assessment for the asst. yr. 1988-89.
2. The assessee is a private limited company engaged in the manufacture of computers. For the asst. yr. 1988-89 the AO found that the assessee was liable to be assessed to tax under s. 115J of the IT Act. Accordingly he determined the book profit at Rs. 47,85,820 and determined the income chargeable to tax at 30 per cent thereof.
3. The first ground raised in this appeal is concerned with the computation of the taxable income under s. 115J. In the annual accounts for the year ending 30th September, 1987 the assessee prepared the P&L a/c as under :
Income Schedule Rs. Rs.
Sales and other income N 12,30,56,923
Expenditure
Excise Duty paid 39,52,808
Manufacturing, administrative
and other expenditure O 11,40,54,793
Depreciation F 14,34,565 11,94,42,166
Profit for the period before tax 36,14,757
Provision for taxation 5,43,000
Profit of the period after tax 30,71,757
Add : Write back of excess depreciation
provided in the earlier years 11,71,063
Balance brought forward from previous
year 42,26,345
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54,97,408
Profit available for appropriation. 85,69,165
Less : Transfer to investment allowance
reserve 2,62,500
Transfer to general reserves. 3,00,000
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5,62,500
Profit available for distribution 80,06,665
Proposed dividend (subject to deduction of
tax)
on equity shares 23,46,440
on preference shares 1,560
Differential dividend pertaining to
previous year 665
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23,48,665
Surplus carried to balance sheet 56,58,000
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Schedule-P contains Notes on Accounts and against Sl. No. 17 there is the following note :
"Method of charging depreciation on fixed assets has been changed during the period from diminishing balance method to straight line method, as provided in s. 205(2)(b) of the Companies Act, 1956 r/w Circular No. 1/86 dt. 21st May, 1986 of the Department of Company Affairs. Consequently an amount of Rs. 11,71,063 has been written back in the accounts being excess depreciation charged for the earlier years. As a result of the change in the method of providing for depreciation the net charge of depreciation in the P&L a/c of the current period is lower by Rs. 21,01,274 and the profit for the period is higher by an equal amount."
Before the AO the assessee claimed that in arriving at the book profit for the purpose of s. 115J the sum of Rs. 11,71,063 credited in the P&L a/c should be excluded as the credit was on account of excess provision for depreciation relating to earlier years. The assessee's claim was that the excess depreciation provided in the accounts for the earlier years and written back to the P&L a/c for the year ending 30th September, 1987 did not form part of the net profit for the current year. The AO did not agree and he included the sum of Rs. 11,71,063 in the book profit and computed the chargeable income under s. 115J on that basis. In the assessee's appeal the CIT(A) held that from the book profit adjustments were permitted only as provided in cls. (i), (ii) and (iii) of the Expln. to s. 115J and that the excess depreciation credited in the P&L a/c did not qualify as a deductible item under the above clauses.
4. On behalf of the assessee, Shri Satyanarayanan, Chartered Accountant submitted before us that the CIT(A) was not correct in holding that the excess depreciation relating to the earlier years formed part of the book profit of the current year and that the same was not to be excluded for the purpose of assessment under s. 115J. The learned representative stated that hitherto the assessee had been providing for depreciation on the diminishing balance method and that during the previous year relevant to the asst. yr. 1988-89 the method of charging depreciation was changed to straight line method in accordance with s. 205(2)(b) of the Companies Act. It was pointed out that the Companies (Amendment) Act, 1988, had prescribed the rates of depreciation on straight line method. Shri Satyanarayanan submitted that after the introduction of the Companies (Amendment) Act, it became obligatory for companies to charge depreciation on straight line method. When the assessee thus made provision for depreciation on straight line method it was found that the provision created in the accounts for the earlier years was more by Rs. 11,71,063 and that amount was then credited to the P&L a/c for the asst. yr. 1988-89. It was his contention that the excess provision relating to the earlier years was not part of the profit of the current year and so it was not includible in the net profit of the business even though the same was credited in the P&L a/c. Shri Satyanarayanan raised another contention that in any case the excess provision for depreciation credited in the P&L a/c was deductible from the book profit under cl. (i) of the Explanation. The learned representative submitted that depreciation was nothing but a provision created by setting aside amounts out of the profits, for the diminution in the value of assets. Drawing our attention to cl. (i) Shri Satyanarayanan contended that the sum of Rs. 11,71,063 withdrawn from the provision for depreciation and credited to the P&L a/c was to be deducted from the book profit. It was submitted that the CIT(A) had erred in holding that the provision for depreciation was not to be reduced from the book profit for the purpose of s. 115J.
5. The Departmental Representative, Shri C. D. Nair, supported the order of the CIT(A) and submitted that for the purpose of assessment under s. 115J, the starting point was the profit as shown in the annual accounts of the company, and that once the amounts were audited and placed before the general meeting and filed with the Registrar of Companies, the statements found therein should be taken to be true and reflecting the correct profit of the business. Shri Nair submitted that when the assessee had credited the excess depreciation in the P&L a/c for the current year, there was no merit in the contention that the same did not form part of the profit of the current year. It was pointed out that for the purpose of s. 115J, from the book profit deduction was permissible as provided in cls. (i), (ii) and (iii) of the Explanation only and that excess depreciation was not such an item eligible for deduction.
6. In s. 115J, by way of explanation it is provided that for the purpose of this section, 'book profit' means the net profit as shown in the P&L a/c for the relevant previous year, prepared in accordance with the provisions of Parts II and III of Sixth Schedule to the Companies Act, 1956, as increased by the amounts mentioned in cls. (a) to (f) and as reduced by the amounts in cls. (i), (ii) and (iii). The assessee-company has prepared the P&L a/c for the previous year relevant for the asst. yr. 1988-89 in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act. It was obligatory on the part of the assessee to provide for adequate depreciation before the net profit was ascertained. Prior to the Companies (Amendment) Act, 1988, depreciation had been provided as per the rates prescribed in the IT Act from time to time in the diminishing balance method. But this year the assessee changed the method to claim depreciation on straight line method, with the result that there was found to be excess provision of Rs. 11,71,063 created in the earlier years. This amount was credited to the P&L a/c and thus brought in as part of the profit of the year. The assessee's claim is for deducting the amount as per the provisions of cl. (i) of the Explanation, which reads as under :
"(i) the amount withdrawn from reserves of provisions, if any such amount is credit to the P&L a/c."
The learned representative of the assessee contends that 'depreciation' is only a provision created for the diminution in the value of assets, on account of wear and tear. In this connection our attention was drawn to Law Lexicon, by Venkataramiya, p. 1951, wherein 'provision' is given the meaning as under :
"Provision - In William Pickles on Accountancy, 3rd Edn., on p. 184, it is stated that 'provision' means the amount set aside out of profits and other surpluses to provide for (a) depreciation, renewals or diminution in value of assets or (b) any known liability of which the amount cannot be determined with substantial accuracy, Pickles has further observed that the amount set aside for the last mentioned purpose in excess of estimated requirement, must be regarded as reserve and sums set aside to meet known liabilities of which the amount can be determined with substantial accuracy did not fall within the definition of 'provision'."
We may also refer to the decision of the Supreme Court in CIT vs. Jyothi Ltd. (1996) 219 ITR 388 (SC) where the distinction between a 'provision' and a 'reserve' is shown as follows :
"The distinction between a provision and a reserve is in commercial accountancy fairly well-known. Provisions made against anticipated losses and contingencies are charges against profits and therefore, to be taken into account against gross receipts in the P&L a/c and the balance sheet. On the other hand, reserves are appropriation of profits, the assets by which they are represented being retained to form part of the capital employed in the business. Provisions are usually shown in the balance sheet by way of deductions from the assets in respect of which they are made, whereas general reserves and reserve funds are shown as part of the proprietors fund. An amount set aside out of profits and other surpluses, not designed to meet a liability, contingency, commitment or diminution in value of assets known to exist at the date of the balance sheet is a reserve, but an amount set aside out of the profits and other surpluses to provide for any known liability of which the amount cannot be determined with substantial accuracy is provision."
The term 'provision' is defined in cl. 7 of Part III of Sch. VI to the Companies Act, 1956, as under :
"(a) The expression "provision" shall, subject to sub-cl. (2) of this clause mean any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy.
This definition of 'provision' in Part III of Sch. VI is quite relevant in considering the meaning of 'book profit' for the purpose of s. 115J, as the starting point for computation of 'book profit' is that net profit as shown in the P&L a/c prepared in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act. The definition in cl. 7 of Part III is therefore quite significant in preparing the P&L a/c in accordance with Parts II and III of Sch. VI. Any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, is included in the definition of 'provision' and so the excess amount of depreciation provided for in the earlier years would qualify under cl. (1) of the Expln. to s. 115J, for reduction as the amount withdrawn from reserves or provision, in any such amount is credited to the P&L a/c. The sum of Rs. 11,71,063 credited to the P&L a/c is to be, therefore, reduced, to arrive at the book profit for the purpose of s. 115J. We agree with the learned representative of the assessee that the CIT(A) was not correct in holding that the book profit is not to be reduced by the excess provision of depreciation credited in the P&L a/c. We accordingly reverse the order of the CIT(A) on this ground of appeal .
7. Though the assessee had raised two other grounds in this appeal : (1) regarding disallowance of Rs. 6,81,724 as claim of excise duty, and (2) regarding disallowance of relief under s. 32AB, these grounds were not pressed before us. These grounds are thus treated as dismissed.
8. In the result, this appeal by the assessee is partly allowed. The AO will revise the assessment accordingly.