Madhya Pradesh High Court
Commissioner Of Income-Tax vs Krishna Oil Extraction Ltd. on 7 October, 1997
Equivalent citations: [1998]232ITR928(MP)
Author: A.K. Mathur
Bench: A.K. Mathur, Dipak Misra
JUDGMENT A.K. Mathur, C.J.
1. This is a reference under Section 256(1) of the Income-tax Act, 1961, at the instance of the Revenue and the following questions of law have been referred by the Tribunal for answer of this court :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the prior period depreciation is an allowable deduction while computing book profit under Explanation (iv) to Section 115J of the Income-tax Act, 1961, read with Section 205(l)(b) of the Companies Act, 1956 ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the prior period expenditure should not be excluded from the computation of book profits under Section 115J within the meaning of net profit given in the Explanation below Section 115J(1A) of the Income-tax Act, 1961 ?"
2. The brief facts giving rise to this reference are that the assessee is a private limited company engaged in the manufacturing of oil from oilseeds, etc. A return showing nil income was filed on December 26, 1989. The Assessing Officer while computing the income, proceeded to determine the same under the provisions of Section 115J of the Income-tax Act, 1961. On examination of the accounts of the company, it reveals that it has charged arrears of depreciation at Rs. 13,42,497 to its profit and loss account. The Assessing Officer further noticed that the assessee-com-pany debited expenses of Rs. 3,24,495 under the head "Item pertaining to previous year". The Assessing Officer asked the assessee to show cause as to why the aforesaid two amounts be not excluded from the determination of book profit under Section 115J of the Income-tax Act, 1961. The Assessing Officer, after taking into consideration the various submissions of the assessee, came to the conclusion that it is not entitled to the adjustments of these amounts and, accordingly, he passed the assessment order on February 28, 1990. The Assessing Officer excluded the prior period expenses of Rs. 3,24,495 while computing income under the provisions of Section 115J of the Income-tax Act, 1961. The Assessing Officer also disallowed the assessee's claim for prior period depreciation and added a sum of Rs. 13,42,497 while completing the assessment on February 28, 1990. The income of the assessee-company was determined as at Rs. 5,19,150 under the provisions of Section 115J of the Income-tax Act, 1961.
3. Aggrieved against the order of the Assessing Officer, the assessee went in appeal before the Commissioner of Income-tax (Appeals) and the Commissioner of Income-tax (Appeals) affirmed the order of the Assessing Officer excluding prior period expenses amounting to Rs. 3,24,495 and the rest of the claim of the assessee was rejected.
4. Aggrieved against the order of the Commissioner of Income-tax (Appeals), the assessee approached the Income-tax Appellate Tribunal and the Tribunal reversed the findings of the Assessing Officer as well as that of the Commissioner of Income-tax (Appeals). The Tribunal allowed that the assessee's claim for prior period depreciation under Section 115J(1A) of the Income-tax Act. Thereafter, the Revenue approached the Tribunal for referring the questions of law before this court and, accordingly, the aforesaid questions of law have been referred for answer of this court.
5. We have heard learned counsel for the parties and perused the records.
6. Shri Abhay Sapre, learned counsel for the Revenue, has submitted that the whole idea behind enacting the provision of Section 115J of the Income-tax Act was to check the tendency on the part of the company to show nil book profit ; therefore, the said Section was added so as to check this tendency on the part of the company to work out nil profit. The whole new scheme was enacted so that the company should work out their book profit in the manner provided under Section 115J of the Income-tax Act. Section 115J is a special provision relating to companies and it starts with a non obstante clause and it says that notwithstanding anything contained in any other provision of this Act, where the 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, 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. "Book profit" has been defined in the Explanation to Sub-section (1A) of Section 115J, which says that 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 to the Companies Act, 1956. "Book profit" has been defined in the Explanation and it says that the 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 the various categories which have been given in (a) to (ha) and it says that if the amount referred to 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 various amounts which have been worked out as given in Clauses (i) to (iv). Clause (iv) says that 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, are applicable. By virtue of Clause (iv), the provisions of the Companies Act stand incorporated under the Income-tax Act.
7. This statutory incorporation means that so far as loss or depreciation is concerned, which is to be given a set off against the profit and loss of the relevant previous year has to be in the manner provided under Section 205(1), Clause (b) of the first proviso, of the Companies Act. Section 205(1), Clause (b) of the first proviso, of the Companies Act which is relevant for our purposes, reads as under :
"Section 205. Dividend to be paid only out of profits--(1) 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 :
Provided that --. . .
(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 the cases after providing for depreciation in accordance with the provisions of Sub-section (2) or against both."
8. Section 205(1), Clause (b) of the first proviso lays down the procedure for declaring dividend and in that case, it is pointed out that 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 the cases after providing for depreciation in accordance with the provisions of Sub-section (2) or against both. Sub-section (2) of Section 205 lays down how the depreciation is to be worked out.
9. For the purpose of working out the balance-sheet of profit and loss, it has to be prepared as per the provisions of Parts II and III of Schedule VI to the Companies Act as also under Section 115J(1A) of the Income-tax Act. Therefore, what is required is that the balance-sheet of the company will be prepared under the provisions of Parts II and III of Schedule VI to the Companies Act. But for the purpose of working out book profits, it has to be done under Section 115J(l)(iv) of the Income-tax Act and the amount of loss or depreciation as worked out under Clause (b) of the first proviso to Sub-section (1) of Section 205 of the Companies Act that will be given set off against profit. To sum up again, the depreciation and loss whichever is less, shall be given a set off against the profits of the company. Therefore, this fiction has been adopted under the Income-tax Act for the purpose of-working out the book profit. The Tribunal has not worked out in detail why the reasoning adopted by the Assessing Officer and affirmed by the Commissioner of Income-tax (Appeals) should not be accepted, but Tribunal had disposed of the whole matter by observing in para. 5 which reads as under :
"We have heard the assessee's counsel and the Departmental representative. As per the provisions of Section 205 of the Companies Act, 1956, which have been adopted in Section 115J(1A), Explanation (iv) of the Income-tax Act, 1961, before declaring dividend, a company must set off the loss or an amount which is equal to the amount provided for that year or those years whichever is less. It is notable that the use of words 'that year or those years' lays emphasis on current depreciation and past depreciation. As it is obvious that without considering arrear depreciation, no company can declare dividend, the depreciation is, in our opinion, an essential charge to be set off against the profits before declaring dividend as no dividend can be declared out of capital under the Companies Act, 1956. It is notable that the provisions of Section 115J(1A) which provides for adjustment out of book profit do not provide for exclusion of arrear depreciation provided under the Companies Act. The Assessing Officer has nowhere given a finding that the assessee is not entitled to extra shift allowance. Therefore, the extra shift allowance has to be taken into consideration. Therefore, the provision made by the assessee is of prior period nature and, in our opinion, the same has to be allowed as deduction. We are, therefore, of the opinion that the Commissioner of Income-tax (Appeals) was not justified in disallowing the claim of the assessee on this account. We direct that the addition of Rs. 13,42,497 added to the book profit under Section 115J be deleted."
10. The Tribunal has not given any reason why the view taken by the Assessing Officer or by the Commissioner of Income-tax (Appeals) should not be preferred and the Tribunal has deleted the addition of Rs. 13,42,497 added to the book profit under Section 115J.
11. As pointed out above, the provisions of Section 205(1), Clause (b) of the first proviso stand statutorily incorporated under the Income-tax Act. Therefore, in order to work out the book profit, the loss and depreciation has to be worked out in terms of the Companies Act and thereafter, set off has to be made of whichever is less, then alone the book profit will be worked out.
12. Shri B. L. Nema, learned counsel for the assessee, has strenuously urged before us that all the previous years' expenditure and loss has to be worked out for the purpose of declaring the balance-sheet and profit and loss. But with great respect, we do not agree with the submission of learned counsel because it was not intended by incorporation fictionally of the provisions of Section 205(1), Clause (b) of the first proviso of the Companies Act. If the intention of the Legislature was to give the benefit of previous years then there was nothing which prevented them to have invoked Section 205(1), Clause (a) of the first proviso of the Companies Act which clearly provides that 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 years to be worked out. But there is no such intention reflected in Clause (b) of the first proviso to Sub-section (1) of Section 205 of the Companies Act. It does not say so in so many words that all the previous years' loss has to be given credit. That appears to be so for the simple reason that if that is permitted then no useful purpose would be served by incorporating Section 115J of the Income-tax Act. The idea behind Section 115J was only to check the tactics adopted by the assessee to work out zero profit of the company ; therefore, this was specially incorporated in Section 115J of the Income-tax Act and a peculiar mode was adopted by working out the book profit. In this view of the matter, we are of the opinion that the view taken by the Tribunal does not appear to be correct.
13. In the result, we answer the aforesaid questions in the light of the aforesaid observations and direct the Tribunal to work out the whole assessment afresh according to the above observations. Hence, this reference is accordingly disposed of.