Madhya Pradesh High Court
Krishna Oil Extraction Ltd. vs Commissioner Of Income-Tax on 29 September, 1997
Equivalent citations: [1998]230ITR806(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 assessee and the following questions of law have been referred by the Tribunal for the answer of this court :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the 'loss' as it appears in Section 205(1), first proviso, Clause (b), of the Companies Act, 1956, read with Section 115J of the Income-tax Act, 1961, means excluding depreciation ?
(2) Whether, on the facts and in the circumstances of the case, the interpretation of the word 'loss' sought to be put on Section 115J of the Income-tax Act by the Tribunal is correct in law ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in placing reliance on the judgment of V. V. Tram-Investments (P.) Ltd. v. CIT [1994] 207 ITR 508 ?
(4) Whether, on the facts and in the circumstances of the case, the judgment of the Andhra Pradesh High Court in the case of V. V. Trans-Investments (P.) Ltd. v. CIT [1994] 207 ITR 508 was a binding precedent for the Income-tax Appellate Tribunal, Nagpur ?"
2. The brief facts giving rise to this reference are that the assessee is a company engaged in the business of oil extraction. It filed a return of income claiming under Section 115J(1A), Explanation (iv), of the Income-tax Act that the loss (including depreciation) and depreciation whichever is less, is to be deducted from current year's book profit. The Assessing Officer interpreted the word "loss" as appears in Section 205(1), clause (b) of the first proviso, of the Companies Act read with Section 115J(1A), Explanation (iv), of the Income-tax Act, as loss excluding depreciation. The Commissioner of Income-tax (Appeals) confirmed the order of the Assessing Officer.
3. The assessee preferred an appeal against the order of the Commissioner of Income-tax (Appeals) before the Tribunal and the Tribunal after considering the matter and relying on the decision of the Andhra Pradesh High Court in V. V. Trans-lnvestments (P.) Ltd. v. CIT [1994] 207 ITR 508, held that the claim of the assessee regarding allowance of a sum of Rs. 18,15,787 cannot be considered. It is pointed out that in view of the decision of the High Court (supra), the Tribunal followed the decision and upheld the order of the authorities below accordingly. Hence, the aforesaid questions of law have been referred by the Tribunal for answer of this court.
4. We have heard learned counsel for the parties and perused the records.
5. Section 115J(1), Explanation (iv), which is relevant for our purposes, reads as under :
"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."
6. Section 205(1), Clause (b) of the first proviso of the Companies Act, which is relevant for our purposes, reads as under :
"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."
7. On a reading of these provisions together, it transpired that Clause (b) of the first proviso of Sub-section (1) of Section 205 of the Companies Act has been fictionally incorporated in the Income-tax Act. By virtue of the statutory incorporation, the book profit has to be worked out under Section 115J in terms of Clause (b) of the first proviso to Section 205(1) of the Companies Act. According to Clause (b) of the first proviso to Section 205(1) of the Companies Act, it clearly transpires 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, I960, 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 of the Companies Act says how depreciation has to be worked out. The basic idea behind Clause (b) of the first proviso to Sub-section (1) of Section 205 is that after working out depreciation or 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 dividend is proposed to be declared. Therefore, as a result of this statutory incorporation, the loss or depreciation whichever is less, shall be set off. In this connection, our attention was invited to the decision of the Andhra Pradesh High Court in the case of V, V. Trans-Investments (P.) Ltd. v. CFT [1994] 207 ITR 508. In that case, it was held that Section 205(l)(b) has been fictionally incorporated in the Income-tax Act but still their Lordships have worked out the profit and loss in terms of the Income-tax Act and not by a borrowed enactment, i.e., under the Companies Act. Once we have held that Section 205(l)(b) of the Companies Act stands adopted under the Income-tax Act then the loss and depreciation have to be worked out in terms of the Companies Act and then the set off has to be given of either of the two and whichever is less ; therefore, in our opinion, the depreciation and loss have to be worked out in terms of the borrowed Act, i.e., under Section 205(l)(b) of the Companies Act and not under the Income-tax Act. Hence, we answer the aforesaid questions in favour of the Revenue and against the assessee.