Bombay High Court
Kinetic Motor Co. Ltd. vs Deputy Commissioner Of Income-Tax on 23 January, 2003
Equivalent citations: (2004)186CTR(BOM)534, [2003]262ITR330(BOM)
Author: J.P. Devadhar
Bench: S.H. Kapadia, J.P. Devadhar
JUDGMENT J.P. Devadhar, J.
1. This tax appeal is filed by the assessee against the order of the Income-tax Appellate Tribunal in I. T. A. No. 515/PN of 1994, dated November 3, 2000, stating that the following substantial questions of law arise out of the aforesaid order of the Tribunal, namely :
"1. Whether in view of specific definition of the expression 'book profit' given in Explanation to Section 115J(1) of the Income-tax Act, it is permissible for the Assessing Officer to make adjustments to the book profit beyond those authorised by the definition and to recast the profit and loss account ?
2. Whether, on the facts and in the circumstances of the case, the Departmental authorities and the Tribunal were justified in rejecting the amount of depreciation actually debited to the profit and loss account admittedly prepared in accordance with Parts II and III of Schedule VI to the Companies Act, 1956, and in holding that the assessee ought to have provided depreciation on the same basis as adopted in the earlier years ?"
2. The assessee is a public limited company engaged in the business of manufacture and sale of two wheelers.
3. The assessment year relevant for the purpose herein is the assessment year 1990-91.
4. In the books of account maintained for the statutory previous year (i.e., financial year) April 1, 1989, to March 31, 1990, the assessee debited an amount of Rs. 6,32,65,430 on account of depreciation. This depreciation was calculated on what is known as the written down value method (WDV), which is one of the permissible methods under the Companies Act as well as under the Income-tax Act. The assessee used to provide the depreciation on straight line method (SLM) in its corporate accounts for which the financial year followed was different, namely, April 1, 1989, to June 30, 1990.
5. In the note to the accounts for the year ended March 31, 1990, it was, inter alia, stated in Clauses 3 and 19 as follows :
"3. Depreciation.--(i) In the current year the company has provided for depreciation on the written down value method at the rates and in the manner specified in Schedule XIV of the Companies Act, 1956, except in respect of items of plant and machinery costing less than Rs. 5,000 for which 100 per cent depreciation is provided in the year in which they are installed and put to use.
(ii) Hitherto depreciation was provided on a straight line method in the following manner :
(a) in respect of assets acquired up to 31st January, 1987, at the rates in force at the time of acquisition of the assets and for the whole financial year, and,
(b) in respect of assets acquired after 31st January, 1987, at the rates specified in Schedule XIV of the Companies Act, 1956, and on a pro rata basis.
As a result of the change to the depreciation method mentioned in (i) above, the company has recomputed the depreciation with retrospective effect (including pro rata depreciation in respect of assets acquired up to 31st January, 1987). The shortfall of depreciation in respect of earlier year arising due to such recomputation amounting to Rs. 3,81,23,644 has been included in the depreciation charge for the year. Had this change not been made the depreciation for the year would have been lower by Rs. 91,23,951."
"19. The company has maintained accounts for the period April 1, 1989, to March 31, 1990, in compliance with the provisions of Section 44AA(2) of the Income-tax Act, 1961, and the profit and loss account is prepared in accordance with Parts II and III of Schedule VI to the Companies Act, 1956."
6. The above treatment resulted in a book loss of Rs. 1,64,49,937. These accounts were certified to be true and fair by the auditors, A. F. Ferguson and Co., subject only to the provision of Rs. 3,81,23,644 in respect of depreciation relating to earlier years arising out of change from the straight line method to the written down value method. The auditors also expressly remarked that had this change not been made by the appellant, the charge of depreciation should have been lower by Rs. 91,23,951 and consequently book profit would be higher by that amount.
7. The Assessing Officer did not dispute that the profit and loss account was prepared strictly in accordance with the requirements of Parts II and III of Schedule VI to the Companies Act, 1956. However, for the purpose of computing book profits under Section 115J of the Income-tax Act, the Assessing Officer took the view that there was no justification for the assessee to change the basis of providing depreciation. According to the Assessing Officer, the change in the method from the straight line method to the written down value was done only to avoid tax on book profits. Accordingly, the Assessing Officer reworked the depreciation at Rs. 1,60, 17,835 by not only excluding the earlier years depreciation but also deducting from book depreciation, the said amount of Rs. 91,23,951. Thus, the Assessing Officer arrived at a revised figure of book profit of Rs. 2,22, 10,525 as against book loss of Rs. 1,64,49,937,
8. On appeal filed by the assessee, the Commissioner of Income-tax (Appeals) concurred with the Assessing Officer and held that there was no justification for change of method from the straight line method to the written down value. On further appeal filed by the assessee, the Tribunal following its earlier decision in the case of Sudarshan Chemical Industries Ltd. v. Deputy CIT [1997] 60 ITD 629 (Pune) confirmed the orders passed by the authorities below. Hence, this appeal at the instance of the assessee.
9. Mr. Inamdar, learned counsel appearing on behalf of the assessee, relied upon the decision of the apex court in the case of Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 and submitted that when the net profits in the profit and loss account are prepared in accordance with Parts II and III of Schedule VI to the Companies Act and the accounts were scrutinised and certified by the statutory auditors, while determining "book profits" under Section 115J, the Assessing Officer had no jurisdiction to go behind the net profits shown in the profit and loss account, except to the extent provided in the Explanation to Section 115J of the Income-tax Act. Alternatively, Mr. Inamdar submitted that even if the contention of the Revenue was accepted and the differential amount of Rs. 91,23,951 arising out the change in the method adopted for calculating the depreciation is taken into account, even then there would be still loss because to the book loss of Rs. 1,64,49,937, the differential amount of Rs. 91,23,951 is added, there would still be book loss of Rs. 73,25,986 and hence the change in the method did not really make any difference and hence the provisions of Section 115J of the Income-tax Act were not attracted.
10. Mr. Desai, learned senior counsel appearing on behalf of the Revenue, on the other hand, supported the orders passed by the authorities below.
11. The short question that arises for consideration in this tax appeal is whether it is open to the Assessing Officer to make adjustment to the book profits beyond what is authorised by the definition given in Explanation to Section 115J of the Income-tax Act, if the accounts are prepared and certified to be in accordance with Parts II and III of Schedule VI to the Companies Act, 1956. In the case of Apollo Tyres ltd. [2002] 255 JTR 273, the apex court held that while computing the income under Section 115J of the Income-tax Act, the Assessing Officer has only power to examine whether the books of account were certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. It is further held that the Assessing Officer thereafter has limited powers of making increases and reductions as provided for in the Explanation to the said section. The apex court further held that the Assessing Officer does not have the jurisdiction to go beyond the net profits shown in the profit and loss account, except to the extent provided in the Explanation to Section 115J of the Income-tax Act. In the instant case, the accounts maintained by the assessee are certified by the auditors. Under the circumstances, the book adjustment made by the Assessing Officer being contrary to the decision of the apex court, question No. 1 is answered in the negative and in favour of the assessee.
12. In view of our answer to question No. 1, question No. 2 becomes academic. It is not in dispute that under the Companies Act, 1956, both straight line method and written down value method are recognised. Therefore, once the amount of depreciation actually debited to the profit and loss account is certified by the auditors, then, as per the decision of the apex court in the case of Apollo Tyres Ltd. [2002] 255ITR 273, question No. 2 has to be answered in the negative and in favour of the assessee.
13. Accordingly, we answer both the questions in the negative and in favour of the assessee.
14. The appeal is disposed of in the above terms with no order as to costs.