Income Tax Appellate Tribunal - Chandigarh
Income-Tax Officer vs Parbhat Forgings (P) Ltd. on 21 June, 1991
Equivalent citations: [1991]38ITD359(CHD)
ORDER
S.P. Kapur, Judicial Member The Revenue appeals and the following substantive ground has been raised before the ITAT :-
On the facts and in the circumstances of the case, the Id CIT (A) has erred in reducing the book profits of Rs. 29,600 to 'nil'.
2. Qua the above issue, the narration in the assessment order is to the following effect:-
Income under Section 115J of the Income-tax Act - Rs. BF Dep. for assessment year 1985-86 1,59,956 BF Business loss for earlier assessment year 55,830 Income for assessment year 1986-87 1,42,725 Less - Business loss adjusted 55,830 ________ 86,895 Unabsorbed dep. for assessment year 1985-86 now adjusted 86,895 ________ nil Unabsorbed depreciation for assessment 1,59,956 year 1985-86 Now carried forward 86,895 ________ 73,061 Income for assessment year 1987-88 Income as declared 1,10,485 Less - BF unabsorbed dep. of assessment 73,061 year 1985-86 Net income for assessment year 1987-88 37,424 Therefore, no depreciation or business loss is to be adjusted against the income of assessment year 1988-89.
3. Before the Id first appellate authority, the assessee has taken the stand :-
(a) that the assessee had not provided depreciation in its books as per the notes given in the balance-sheet in the earlier years:
(b) that the depreciation not provided for the Assessment years 85-86, 86-87 and 87-88 was Rs. 6,95,549, against which the book profits before depreciation was Rs. 2,52,994;
(c) that under Section 115J, the book profit is the net profit as shown in the profit and loss account prepared in accordance with the provisions of Part II of 6th Schedule of the Companies Act;
(d) that the book profit under the Companies Act is to be reduced as per Clause III by business loss or depreciation, whichever is less, before declaring any dividend;
(e) that Part II of 6th Schedule of the Companies Act requires the provisions of depreciation in the balance-sheet or a statement of quantum of arrears of depreciation to be disclosed;
(f) that in this view of the matter, the balance-sheet after adjustment of total depreciation was Rs. 4,42,555; and
(g) that as such Section 115J was not attracted. Reliance was placed before the Id first appellate authority, on behalf of the assessee, on the balance-sheet filed with the Department for earlier years and copies of assessment orders for earlier years, to prove that the depreciation has not been considered for those years. The Id first appellate authority held as under:-
2.1 The contention of the appellant is correct. Under Section 115J Explanation III(1) requires the amount of the loss or the amount of depreciation which would be required to set off against the profit of the relevant previous year as if the provisions of Clause (b) of 1st proviso to Section 1 of Section 205 of the Companies Act is applicable. Section 205 provides that, if the company has not provided any depreciation for any previous financial year, it shall before declaring or paying dividend for any financial year provide for such depreciation out of the profits of that financial year or out of the profits of any other previous financial year or out of the profits of any other previous financial year or years. Section 205 proviso (b) provides that, if the company has incurred any loss in any financial year or years, then the amount of loss for that year or those years', whichever is less, shall be set off against the profits of the company for the year for which the dividend is proposed to be declared. Thus in the case of the appellant, the depreciation of the previous years had not been provided for, therefore, the book results will have to be adjusted by the depreciation. After adjustment of the depreciation, there are no book profits, therefore, the ITO was not justified in assessing the income at Rs. 29,600 being 30% of the book profits. This income is reduced to 'nil'.
4. The Revenue is aggrieved and I have heard the parties at length. The orders of the Id lower authorities along with contents of the assessee's paperbook (45 pages) have been considered and taken note of. Section 115J finds mention in Chapter XII-B and deals with the topic, 'Special Provisions relating to certain companies'. This Chapter was inserted by the Finance Act, 1987, with effect from 1-4-1988 and reads as under:-
115 J(1) Notwithstanding anything contained in any provision of this Act, where in the case of an assessee being a company, 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 (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 tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit.
Explanation: For the purpose of this Section, 'Book profit' means the net profit as shown in the profit and loss account for the relevant previous year prepared in accordance with the provisions of Parts II and III of the Sixth Schedule to the Companies Act, 1956 (1 of 1956), as increased by -
(a) the amount of income-tax paid or payable and the provision therefor; or
(b) the amounts carried to any reserve, by whatever name called; or
(c) the amount or amounts set aside to provisions made for meeting liabilities other than ascertained liabilities; or
(d) the amount by way of provision for losses of subsidiary companies; or
(e) the amount or amounts of dividends paid or proposed; or
(f) the amount or amounts of expenditure relatable of any income to which any of the provisions of Chapter III applies, if any such amount is debited to the profit and loss account and as reduced by -
(i) the amount withdrawn from reserve or provisions, if any such amount is credited to the profit and loss account; or
(ii) the amount of income to which any of the provisions of Chapter III applies, if any, such amount is credited to the profit and loss account; or
(iii) 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 205 of the Companies Act, 1956 (1 of 1956), are applicable. (emphasis supplied) (2) Nothing contained in Sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward 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 74 A or Sub-section (3) of Section 80J.
5. From a reading of the above Section, it follows that the book profit has to be taken as in Parts II and III of the Sixth Schedule to the Companies Act, 1956(1 of 1956), as increased by the amounts provided in Sub-clauses (a) to (f) of Section 115J(1). Again this is to be reduced by the amounts provided in Sub-clauses (i) to (iii) of Sub-clause (f) of said Section 115J(1). Here reference is made to the provisions of Clause (b) of the first proviso to Sub-section (1) of Section 205 of the Companies Act, 1956. Firstly, we go to Parts II and III of the Sixth Schedule to the Companies Act, 1956 and thereafter we will discuss Section 205 of the Companies Act and the relevant provisions to be referred to. Schedule VI deals with form of balance sheet. Under part II of the said Schedule, 'Requirements as to profit and loss account' is provided for. Paragraph 1 therein speaks of that, 'the provisions of this part shall apply to the income and expenditure account referred to in Sub-section (2) of Section 210 of the Act, in like manner as they apply to a profit and loss account, but subject to the modification of references as specified in that Sub-section'. So, in substance, this part deals with the requirement as to the profit and loss account providing, inter alia, certain pre-requisites and under paragraph II(iv), the requirement is that, 'the amount provided for depreciation', renewals or diminution in value of fixed assets. If such provision is not made by means of a depreciation charge, the method adopted for making such provision. If no provision is made for depreciation, the fact that no provision has been made shall be stated and the quantum of arrears of depreciation computed in accordance with Section 205(2) of the Act shall be disclosed by way of a note.
5A. Coming to Part III, it deals with, 'interpretation' for the purposes of Parts I and II of the Schedule (above referred to). The interpretation provided for are, 'provision', 'reserve', 'capital reserve' and 'liability'. The expression 'provision' has been interpreted as, '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.
5B. Now coming to Section 205 of the Companies Act and the relevant provisions referred to in Section 115J of the Act, which is Clause (b) of the first proviso to subSection (1) of Section 205 of the Companies Act, Section 205 deals with the Chapter 'Dividend to be paid only out of profits'. Sub-clause (1) of Section 205 reads as under :-
No dividend shall be declared or paid by a company for any financial year except out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of Sub-section (2) or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with those provisions and remaining undistributed or out of both or out of moneys provided by the Central Government or a State Government for the payment of dividend in pursuance of a guarantee given by that Government.
Clause (b) of first proviso thereto, reads as under :-
(b) if the company has incurred any loss in any previous financial year or years, which falls or fall after the commencement of the Companies (Amendment) Act, 1960, then, the amount of the loss or an amount which is equal to the amount provided for depreciation for that year or those years whichever is less, shall be set off against the profits of the Company for the year for which dividend is proposed to be declared or paid or against the profits of the company for any previous financial year or years, arrived at in both cases, after providing for depreciation in accordance with the provisions of Sub-section (2) or against both.
Sub-clause (2) of Section 205 reads as under :-
(2) For the purpose of Sub-section (1), depreciation shall be provided either -
(a) to the extent specified in Section 360; or
(b) in respect of each item of depreciable asset, for such an amount as is arrived at by dividing ninety-five per cent of the original cost thereof to the company by the specified period in respect of such asset; or
(c) on any other basis approved by the Central Government which has the effect of writing off by way of depreciation ninety-five per cent of the original cost to the company of each such depreciable asset on the expiry of the specified period; or
(d) as regards any other depreciable asset for which no rate of depreciation has been laid down by the Indian Income-tax Act, 1922, or the rules made thereunder, on such basis as may be approved by the Central Government by any general order published in the Official Gazette or by any special order in any particular case:
Provided that where depreciation is provided for in the manner laid down in Clause (b) or Clause (c), then, in the event of the depreciable asset being sold, discarded, demolished or destroyed the written down value thereof at the end of the financial year in which the asset is sold, discarded, demolished or destroyed, shall be written off in accordance with the proviso to Section 350.
5C. Sub-section (2) of Section 205 Sub-clause (a) refers to Section 350 of the Companies Act, but that Section does not concern a private limited company, hence no useful reference can be made to the said Section.
6. Now a reading of Section 115J(1), Parts II and HI of sixth Schedule to the Companies Act, Clause (b) of first proviso to Sub-section (2) of Section 205 and of subSection (2) of said Section 205 of the Companies Act, makes it abundantly clear that to claim depreciation either the claim has to be under the provisions of the Income-tax Act or else it is to be under Section 205(2)(b), i.e., 'in respect of each item of depreciable asset, for such an amount as is arrived at by dividing ninety-five per cent of the original cost thereof to the company by the specified period in respect of such asset; or else on the basis approved by the Central Government which has the effect of writing off by way of depreciation ninety-five per cent of the original cost to the company of each such depreciable asset on the expiry of the specified period'.
7. The asscssee has not claimed depreciation for earlier years. However, note 8 at page 10 of the assessee's paper book attached with the balance-sheet for the period ending 31-10-1986, i.e. relevant to the assessment year under appeal, reads as under:
The company has not provided depreciation on fixed assets accumulated to Rs. 6,95,549. (1985-86 Rs. 2,08,438), (1984-85 Rs. 2,29,995) and (1983-84 Rs. 2,57,116). However, the depreciation has been provided during the year on WDV as on 31-10-1986 after giving effect of intermediate years.
The above note speaks of that the depreciation has been provided during the year, i.e., for the assessment year under appeal, on WDV as on 31-10-1986. In view of the above note, the impugned order of the Id assessing officer merits to be upheld, since it complies with the provisions of Section 115J. The resultant effect is that when the assessee has claimed depreciation in relation to the assessment year under appeal, but has not claimed depreciation relating to earlier assessment year, within the meaning of Section 115 J read with Parts II and III of the Sixth Schedule and Clause (b) of first proviso to Sub-section (1) of Section 205 of the Companies Act, the depreciation has to be taken as provided for and the assessee cannot claim set off of earlier years' depreciation in computing the book profit as is envisaged in the Explanation attached to Section 115J(1). The impugned order of the learned first appellate authority stands reversed and that of the assessing officer stands restored.
8. The Revenue succeeds and its appeal stands allowed.