Kerala High Court
Commissioner Of Income-Tax vs Appollo Tyres Ltd. on 19 August, 1998
Equivalent citations: [1999]237ITR706(KER)
Author: G. Sivarajan
Bench: G. Sivarajan
JUDGMENT G. Sivarajan, J.
1. Both these cases arise from a common order of the Income-tax Appellate Tribunal, Cochin Bench, in I. T. A. No. 301/Coch. of 1991. The assessment year concerned is 1988-89. The relevant accounting period ended on October 31, 1987. The Revenue sought reference of as many as 12 questions under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), for opinion of this court. The Income-tax Appellate Tribunal forwarded a statement of case dated November 30, 1993, and referred the following questions for opinion of this, court :
"1. Whether, on the facts and in the circumstances of the case, the assessee-company's determination, as accepted by the Tribunal, of net profit after providing for the arrears of depreciation in the profit and loss account of the company for the relevant accounting year was in accordance with Parts II and III of Schedule VI to the Companies Act, 1956, as required under Section 115J of the Income-tax Act, 1961 ?
(i) Whether, on the facts and in the circumstances of the case, it is mandatory on the part of the company, to provide for the arrears of depreciation (in respect of additional shifts in view of Schedule XIV to the Companies Act coming into force with effect from April 2, 1987), if it was not originally provided in the earlier years ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that--
(i) the entire business of the assessee-company including the earning of dividend income is eligible business within the meaning of Sub-section (2) of Section 32AB of the Income-tax Act, 1961 ?
(ii) the dividend income amounting to Rs. 1,51,89,760 should be included in computing the profits of the eligible business under Sub-section (3) of Section 32AB of the Income-tax Act ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that--
(i) in computing 20 per cent. of the eligible profit, the income from the Unit Trust of India (dividends and profit or loss on the sale of units) should also be considered along with other income ;
(ii) 'two activities of the assessee have to be considered as forming part of the same business . . .
(iii) as both the activities constituted the same business, which is an eligible business, provisions of Section 32AB(3)(b) are not applicable?' "
2. This is the subject-matter of I. T. R. No. 70 of 1994. Since the Income-tax Appellate Tribunal did not refer all the 12 questions sought to be referred by the Revenue it filed O. P. No. 2487 of 1994 seeking reference of the remaining questions also. This court by judgment dated November 7, 1994, directed reference of the following questions also for the opinion of this court :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the expenditure incurred for the wife of the chairman-cum-managing director of the company for foreign travel is an allowable deduction ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee's business in the purchase and sale of units and its business in the manufacture and sale of tyres constituted one and the same business ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the buying and selling of units is not a speculation business and that the loss of Rs. 22,69,700 was allowable as a business loss and that it cannot be treated as a speculation loss ?"
3. It was observed in the said judgment that the Tribunal has already made reference of questions Nos. 1, 3 to 6, 8 and 9(a) and also observed that questions Nos. 2, 10 and 12 need not be referred as they are merely argumentative. The questions directed to be referred in 0. P. No. 2487 of 1994 are the subject-matter of the reference in I. T. R. No. 43 of 1997.
4. In I. T. R. No. 70 of 1994 there is an important question regarding the scope of the Explanation to Section 115J of the Income-tax Act, 1961, particularly the expressions "prepared in accordance with the provisions of Parts II and III of the Sixth Schedule to the Companies Act, 1956" and Clause (iii) of the said Explanation as it stood at the relevant period for arriving at the "book profit" for the purposes of Section 115J.
5. The matter arises this way. The assessee is a public limited company. It is engaged in the business of manufacture and sale of tyres and tubes. For the assessment year 1988-89, the assessee filed its return of income on June 29, 1988. The assessee computed the book profits for the purpose of Section 115J of the Act at Rs. 69,94,983 and 30 per cent. of the above was shown at Rs. 20,98,495. For arriving at the said figure, the assessee had shown net profit as per the profit and loss account at Rs. 69,91,306 to which it added provision for income-tax Rs. 16,00,000 and deducted two sums of Rs. 15,44,122 and Rs. 52,201 representing the amount transferred from capital reserve adjusted against depreciation and interest on post office savings bank account exempt under Section 10(15)(i) and Chapter III, respectively. The assessing authority noted that the assessee, in arriving at the net profit of Rs. 69,91,306, made a deduction of Rs. 13,66,39,051 by way of arrears of depreciation. The deduction of Rs. 13,66,39,051 representing the arrears of depreciation, according to the assessing authority, was not in accordance with the provisions of Part II and Part III of the Sixth Schedule to the Companies Act, 1956. According to the assessing authority, this deduction is not permissible either under Part II or under Part III of the Sixth Schedule to the Companies Act or under Section 115J of the Act. The assessing authority has also noted that the assessee itself did not consider that the arrears of depreciation is deductible in the profit and loss account for arriving at the net profit, as is seen from the figures contained in the directors' report to the shareholders. He noted that in the said report arrears of depreciation amounting to Rs. 13,66,39,051 was shown only by way of an adjustment below the line of net profit. The assessing authority accordingly concluded that the net profit as per accounts should be taken at Rs. 14,36,30,357. The assessing authority made further adjustments to the same as contemplated in the Explanation to Section 115J of the Act, Thus, he added a sum of Rs. 16,00,000 being provision for income-tax and deducted Rs. 15,44,122 and Rs. 52,201 as mentioned earlier and arrived at the "book profit" at Rs. 14,36,34,034 and 30 per cent. of the above was fixed at Rs. 4,30,90,210.
6. Being aggrieved by the computation made by the assessing authority, the assessee took up the matter in appeal before the Commissioner of Income-tax (Appeals), Kochi. The appellate authority confirmed the computation of book profit arrived at by the assessing authority. Thereafter, he considered the question as to whether the Explanation to Section 115J will make any difference in the book profit for the purpose of tax computation under Section 115J. For the said purpose, he referred to the provisions of clause (iii) of the Explanation which contemplates reduction of 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.
7. Referring to Clause (b) of the proviso to Section 205(1), the first appellate authority observed that by virtue of Clause (iii) of the Explanation to Section 115J, the extent of loss incurred by the company in the past or the amount of depreciation provided for that year or those years whichever is less has to be adjusted. He further observed that the assessing authority had fixed an amount of Rs. 14,36,34,034 without considering the provisions of clause (iii) of the Explanation to Section 115J and directed the assessing authority to set off the business loss or depreciation whichever is less in accordance with the provisions of Section 205(1)(b) of the Companies Act for arriving at the book profit. He also directed that this amount has to be ascertained from the profit and loss account of the company from the very beginning and lesser amount of loss or depreciation has to be deducted from the gross amount.
8. The assessee, not being satisfied with the above, filed further appeal before the Income-tax Appellate Tribunal, Cochin Bench. The Tribunal accepted the contentions of the assessee that for arriving at the net profit for the purpose of Section 115J prior year's depreciation has necessarily to be deducted from the current year's profit, as otherwise, the profit and loss account will not reflect the true financial position of the company. The Appellate Tribunal accordingly held that the assessee was perfectly justified in deducting the sum of Rs. 13,66,39,051 from the current year's profit. The Tribunal further held that in a case where net profit is arrived at in the profit and loss account after deducting the prior year's depreciation there is no question of further adjusting the amount provided in Clause (iii) of the Explanation to Section 115J of the Act. The various findings rendered by the Tribunal in support of its conclusion are as follows :
(1) By the introduction of Schedule XIV (effective from April 2, 1987) in the Companies Act, 1956, providing for separate depreciation rates for single shift, double shift and triple shift working, the assessee's previous year having ended after the introduction of Schedule XIV, for the first time, an unambiguous and clear liability was cast on the assessee to work out the depreciation on the basis of the said Schedule for the year in question.
(2) The companies which are desirous of paying dividend for any financial year out of its profit have necessarily to provide for arrears of depreciation as well as the depreciation for the financial year concerned under clause (a) of the first proviso to Section 205(1) of the Companies Act and this is a mandatory requirement of the company.
(3) Section 350 of the Companies Act prescribes only the mode of calculation of depreciation on the written down value method for the purpose of ascertaining the managerial remuneration under Section 349(4)(k) of the Companies Act while the obligation to provide for depreciation in the accounts arises only under Section 205 and not under Section 350. Section 205, besides creating a charge of depreciation, also provides for alternative methods of depreciation and one such method is found in Section 350 of the Companies Act. In other words, Section 205 is a charging Section and Section 350 is a machinery section as regards depreciation.
(4) In the light of para. 3(iv) of Part II and para. 7 of Part III of the Schedule VI which contains a definition of "provision", it is to be inferred that the profit and loss account must disclose the provision for depreciation on its fixed assets. If the provision for depreciation was not made, the arrears of depreciation in terms of Section 205(2) should also be quantified in addition and highlighted by way of a separate note. In other words, the intention of the Legislature as evident in para. 3(iv) is to look upon arrears of depreciation as part of current depreciation.
(5) Even assuming that the arrears of depreciation are not part of current depreciation, the charging of arrears of depreciation in the profit and loss account in the current year is a necessary requirement in assessing its impact on the current profits. A. S. 5 issued by the I. C. A. I. in November, 1982, also provides that prior period items representing as material charges or credits which arise in the current period should be reflected in the profit and loss account of the current year. Non-charging of depreciation in the earlier years can, at the worst, be viewed as error or omission, and the same could be charged on a provision being made therefor in the profit and loss account of the current year. The only condition is that the fact must be disclosed or highlighted in the accounts. When the Revenue emphasised Sub-clause (a) of para. 7(2) of Part III they overlooked Sub-
clause (b) of the same para, which is wider in its import and inclusive in content. The prior period expenses or income would fall under Sub-clause (b) as material features affecting the accounts. A cumulative reading of Sub-clauses (a) and (b) of para. 7(2) of Part III will show that arrears of depreciation, even if it is considered as a prior period expenditure, will have its natural accommodation in the profit and loss account of the current year.
(6) Arrears of depreciation even if it is only an appropriation and not a charge on the profit of the current year, still the same cannot be added back to enhance the book profit under Section 115J. The Explanation to Section 115J deals with certain specific adjustments, which are specified therein. Some of them clearly relate to the income or expenditure of the current year which will be found debited or credited in the profit and loss account. Clause (iii) (later renumbered as Clause (iv)) dealing with past losses or past depreciation will not figure anywhere in the profit and loss account of the current year. Though Clauses (a) to (e) and Clause (i) provide for adjustment, there is no mention anywhere for adjustment of prior period expenses such as arrears of depreciation whether it is looked upon as a charge against the profit or as an appropriation of profit.
(7) The Legislature must be credited with the knowledge of several items that appear in the profit and loss account including the appropriations found therein and, therefore, any item which is not earmarked for adjustment in the Explanation cannot be brought within the mischief of the Explanation to Section 115J. In other words, the assessing authority has no jurisdiction to make additions or subtractions as he likes contrary to what is specifically provided for in Section 115J.
(8) The assessing authority had taken the view that neither in terms of Parts II and III of Schedule VI nor under the Act, arrears of depreciation not provided for in the earlier years could be charged against the profit of the current year drawing support from the directors' report on the relevant annual accounts placed before the shareholders at the annual general meeting wherein the arrears of depreciation has been shown as an adjustment below the line of net profit and accordingly held that the book profit should be taken as that shown above the line, i.e., before the debit of the said arrear depreciation. This approach was not a valid one. The financial results given in the directors' report was an abridged version of the detailed profit and loss account and, therefore, no adverse inference could be drawn therefrom.
9. The aforesaid findings of the Appellate Tribunal are questioned by the Revenue in I. T. R. No. 70 of 1994. Shri P.K.R. Menon, learned counsel appearing for the Revenue, contended before us that the Income-tax Appellate Tribunal was not justified in holding that the net profit has to be arrived at after adjusting the prior year's depreciation and that Clause (iii) of the Explanation to Section 115J has no relevance in a case where net profit has been arrived at after deducting the prior year's depreciation not provided for in the earlier year's profit and loss account. Learned counsel also submitted that Section 115J incorporates only the provisions of Parts I and II of the Sixth Schedule of the Companies Act for the preparation of the profit and loss account and also the provisions of Clause (b) of the proviso to Sub-section (1) of Section 205 of the Companies Act. According to learned counsel, these are the only two provisions of the Companies Act which are relevant to be considered in the application of Section 115J of the Act. According to him, this is a case of legislation by incorporation and once certain provisions of the Companies Act are incorporated in Section 115J of the Income-tax Act for the purpose of the assessment under the Act, the other provisions of the Companies Act have no application and that the provisions of the Companies Act cannot be looked into for the application of Section 115J of the Act thereafter. According to him, this is a case of legislation by incorporation and, therefore, any subsequent amendments made to the incorporated provisions in the Companies Act have no application in the matter of assessment under Section 115J of the Act. Thereafter, the provisions of Section 115J have to be interpreted consistent with the other provisions of the Income-tax Act. On the basis of the above, learned counsel further submitted that the amendments made to Section 205(2) and 350 of the Act by the Companies (Amendment) Act, 1988, and the provisions of Schedule XIV inserted by the said Amendment Act with retrospective effect from April 2, 1987, also have no application to the assessment in question. Learned senior counsel also submitted that the expressions "the loss" and "set off" used in Clause (iii) of the Explanation to Section 115J are significant. He also submitted that the expression "provided" in Clause (b) of the proviso to Section 205(1) of the Companies Act also is significant. He submitted that under the provisions of the proviso to Clause (b) of Section 205(1) of the Act only the amount already provided can be adjusted from the net profit. According to him, the use of the expression "set off" also connotes only the current year's loss/depreciation and, therefore, carried forward or unabsorbed loss/depreciation cannot be adjusted by resort to Clause (iii) of the Explanation. Counsel, in that context, referred to and relied on the observations of Kanga "The Law and Practice of Income Tax", fourth edition (1959), volume I, at page 351, dealing with the provisions of Section 10(2)(vi) of the Indian Income-tax Act, 1922, and the provisions of Sections 70 and 72 of the 1961 Act and submitted that the current year's liability alone can be considered. Counsel further relied on the decision of the Andhra Pradesh High Court in V. V. Trans-Investments (P.) Ltd. v. CIT [1994] 207 ITR 508. He submitted that the Tribunal failed to consider the importance of the non obstante clause in Sub-section (1) of Section 115J of the Act as also the significance of legislation by incorporation used in the Explanation to the said Sub-section. He also submitted that the Tribunal did not bear in mind the background and circumstances of introduction of the special provisions regarding computation of total income chargeable to tax in respect of certain companies. It is contended that the Tribunal has erroneously assumed that the provisions of the Companies Act other than what is incorporated in the Explanation are also applicable for the fixation of the "book profit" for the purposes of Section 115J. The sum and substance of the argument of learned counsel for the Revenue is that in arriving at the net profit the assessee cannot deduct the prior year's depreciation not provided for in the earlier year's profit and loss account and that the same cannot be allowed to be adjusted in arriving at the book profit. Learned counsel canvassed for acceptance the computation of net profit/book profit made by the assessing authority and affirmed by the first appellate authority.
10. Shri Sarangan, learned counsel appearing for the assessee, on the other hand, sought to support the order of the Income-tax Appellate Tribunal holding that the assessee is entitled to adjust the amount of depreciation not provided for in the profit and loss account of the earlier years since the assessee is entitled to compute the depreciation for the earlier years taking into account the extra shift allowance also particularly in view of the amendment to the Companies Act in 1988 inserting Schedule XIV effective from April 2, 1987, which falls during the accounting period relevant to the assessment year in question. Learned counsel supported the findings of the Tribunal to the above effect by relying on the clarifications issued by the Company Law Board in various circulars, the opinion expressed by the Institute of Chartered Accountants of India and other commentaries of company law and the Income-tax Act. Learned counsel also submitted that the concept of depreciation is for the purpose of providing for the wear and tear effected to the plant and machinery installed by the assessee and that if that is the intention behind providing for depreciation, if an assessee has used the machine in addition to the normal use by way of extra shift--single shift, double shift and triple shift--the wear and tear of the plant and machinery is more and a prudent company would provide for such depreciation taking into account the constant use of the plant and machinery, as otherwise at any particular point of time, the asset of the company could not be reflected truly and correctly. Learned counsel submitted that the assessee was entitled under the provisions of Section 205(2)(b) of the Companies Act to provide for depreciation over and above the normal depreciation by taking into account the extra shift allowance also, that it has been so clarified by the Company Law Board in its various circulars and that the assessee did not and could not provide for such depreciation only because of the legal opinion to the effect that in a case where an assessee claims depreciation by following the straightline method it is not entitled to provide any additional depreciation taking into account the extra shift allowance. It is also pointed out that the company in the profit and loss account for the earlier years has specifically said so in the profit and loss account itself. It is also pointed out that the assessee-company in the assessment year in question has provided for such amounts lumping up unprovided for depreciation for all the earlier years as provided for in Clause (b) of the first proviso to Section 205(1)(b) of the Companies Act and that the assessee-company was perfectly justified in doing so. Learned counsel drew support for the above from Schedule XIV of the Companies Act inserted on May 24, 1988, with effect from April 2, 1987, by the Companies (Amendment) Act, 1988. Schedule XIV to the Companies Act for the first time provides for the rate of depreciation. It can be seen from Schedule XIV, which has reference to Sections 205 and 350 of the said Act, that different rates of depreciation are provided for single shift, double shift and triple shift depending on the nature of the assets. Under single shift, it provides for written down value method as well as the straightline method. For double shift and triple shift also the same method is provided. According to learned counsel for the assessee, there was no taboo for claiming depreciation for single shift, double shift and triple shift in addition to the straightline method. According to him, the view taken by the assessee-company that it is entitled to claim depreciation on extra shift allowance in addition to the straightline method was supported by the bill, that this Schedule is given effect to with retrospective effect from April 2, 1987, and, therefore, even the Schedule applied to the accounting period relevant to the assessment year in question and that even assuming that the Schedule is not applicable, the asses-see was perfectly justified in providing for depreciation taking into account the extra shifts made by the assessee in the earlier years. It is submitted that the assessee has not adopted the rates provided in Schedule XIV, but had only found support of the view taken by it from the said Schedule. Learned counsel also submitted that the accounting principle is very relevant in this matter. He relied on the decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 in support of the same. Relying on the said decision he submitted that the accounting principles may have to be applied in the matter of preparation of profit and loss account and if those accounting principles and the practice followed are also taken into consideration, prior period expenses have also to be added to the current year's liability and the net profit to be arrived at is current year's profit minus the prior period expenses/liability. Learned counsel also submitted that if the net profit has to be arrived at after adjusting the prior period depreciation then there is no question of application of Clause (iii) of the Explanation to Section 115J. Learned counsel also submitted that, if for any reason, for arriving at the net profit as per the profit and loss account prior period depreciation cannot be adjusted, then necessarily the adjustment contemplated under Clause (iii) of the Explanation to Section 115J has to be made. It is submitted that in the view taken by the Tribunal in this case the Tribunal did not have an occasion to consider the application of Clause (iii) of the Explanation to Section 115J. He submitted that this court has to interpret the scope and ambit of Clause (iii) of the Explanation to Section 115J and the matter has to be remanded to the Tribunal for considering the question of adjustment in the light of the interpretation so placed by this court. Regarding the scope of Clause (iii) of the Explanation to Section 115J counsel submitted that the expression "the loss" referred to therein takes in unabsorbed depreciation also and in that view of the matter arrears of depreciation computed for the earlier years taking into account extra shift allowance also is liable to be deducted from the net profit in the profit and loss account. Learned counsel also submitted that reference to the provisions of Part II and Part III of the Sixth Schedule to the Companies Act, 1956, and Clause (b) of the first proviso to Section 205(1) of the said Act in the Explanation can be considered only as a legislation by reference and, therefore, all the provisions of the Companies Act are applicable for understanding the said provisions. He further submitted that the expression "loss" used in Clause (iii) must be understood in the context of the provisions of the Companies Act and not under the provisions of the Income-tax Act. He further submitted that the decision of the Andhra Pradesh High Court in V.V. Trans-Investments Pvt. Ltd. v. CIT [1994] 207 ITR 508 is distinguishable. The reasons stated are that, (1) in the decided case there was no provision for arrears of depreciation in the profit and loss account, and (2) the question of what is "net profit" was not in issue in that case.
11. In order to appreciate the merits of the rival submissions made by counsel appearing on either side, it is necessary to refer to the provisions of Section 115J of the Act, the relevant provisions of the Companies Act and the background for the introduction of this special provision in the Act. Section 115J of the Act as it stood at the relevant time reads as follows:
"115J. Special provisions relating to certain companies.--(1) Notwithstanding anything contained in any other 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 purposes 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 reserves, 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 to 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 reserves or provisions, if any such amount is credited to the profit and loss account ;
(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.
(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 74A or Sub-section (3) of Section 80J."
12. Before proceeding to consider the scope and ambit of Section 115J of the Act, it is necessary at this stage to examine the background of the said provision. Before the introduction of Section 115J the position was that the income chargeable to tax under the head "Profits and gains of business or profession" shall be computed in accordance with the provisions contained in Sections 30 to 43C. This was the position with respect to every person who is subjected to be charged under Section 4 of the Act. The Legislature, by the Finance Act, 1983, introduced a new chapter--Chapter VI-B--containing only one provision--Section 80WA--imposing restriction on certain deductions in the case of companies, with effect from April 1, 1984. Later, by the Finance Act, 1987, the said Chapter was deleted with effect from April 1, 1988. Simultaneously, in the Finance Act, 1987, itself a new Chapter--Chapter XII-B--containing only one section--Section 115J--
was inserted. So, as on the date of introduction of Section 115J, i.e., from April 1, 1988 (ignoring Section 80WA): a company, which carries on business falling under Section 28, is bound to compute its total income in accordance with the provisions of Sections 30 to 43C of the Act and it is liable to pay tax under the Act only on the total income computed thus as if the provisions of Section 80WA is applied, where the aggregate of the amount of deductions mentioned under Sub-section (2) of the said Section exceeds seventy per cent. of the pre-incentive total income, i.e., the amount before deduction of the amounts mentioned in Sub-section (2) thereof, the aggregate of the amount to be allowed as deduction shall be restricted to seventy per cent. of the pre-incentive total income. Now we will consider the effect of or the scope of Section 115J. Sub-section (1) of the said Section opens with the non-obstante Clause--Notwithstanding anything contained in any other provision of this Act. It proceeds to say that in the case of an assessee being a company, where 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, is less than thirty per cent. of its book profit, then 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. Thus, the provisions of Sub-section (1) of Section 115J requires the computation of total income of an assessee, being a company, in accordance with the provisions relating to the assessment of income chargeable to tax under the head "Income from business". It also requires the assessee, being a company, to make a computation of its total income based on its book profit. The computation of the latter figure of total income being thirty per cent. of its book profit, the company is obliged to compute its book profit. The mode of computation of "book profit" is provided in the Explanation to the said Sub-section. As already stated, the application of Section 115J of the Act arises only in a case where the total income as computed in accordance with the normal provisions of the Act, in the case of a company is less than thirty per cent. of its book profit. In other words, if, on a comparison of the total income computed under the normal provisions of the Act with the book profit arrived at as per the Explanation, the total income as computed is less than thirty per cent. of the book profit, then Section 115J is attracted and the total income of the company shall be deemed to be thirty per cent. of the book profit. In the instant case, there is no dispute with regard to the application of Section 115J of the Act, for, even as per the computation made by the assessee the total income computed in accordance with the normal provisions of the Act is less than thirty per cent. of its book profit as computed by the assessee. The only dispute in this case is regarding the amount of book profit. As already stated, the Explanation to Sub-section (1) defines what "book profit" is. It 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 (1 of 1956) with the adjustments provided in Clauses (a) to (f) and (i) to (iii) of the Explanation. Amounts mentioned in Clauses (a) to (f) have to be added to the net profit arrived at as above if the said amounts had been debited in the profit and loss account and the amounts mentioned in Clauses (i) to (iii) shall be debited from the net profit if the said amounts are credited to the profit and loss account. Clause (iii) also provides for deduction of the amount mentioned therein, which does not mention anything about debit or credit in the profit and loss account. In spite of the definition of "book profit" contained in the Explanation, dispute has arisen about the ascertainment of book profit. As already noticed, the Explanation contemplates two steps. The first step deals with the preparation of the profit and loss account in accordance with the provisions of Parts II and III of the Sixth Schedule to the Companies Act for arriving at the net profit. The second step deals with the adjustments contemplated in Clauses (a) to (f) and (i) to (iii) of the Explanation from the net profit as arrived at above. The dispute, as already stated, is regarding the debit of a sum of Rs. 13,66,39,051 representing arrears of depreciation in the profit and loss account of the assessee-company for the assessment year in question. According to the assessee, it is bound to make provision for arrear depreciation in the profit and loss account for the previous year prepared in accordance with the provisions of Parts II and III of the Sixth Schedule to the Companies Act. But, according to the Department, it is not contemplated. Thus, it can be seen that the first step is the preparation of the profit and loss account for arriving at the net profit. The Explanation itself contemplates the preparation of the profit and loss account for arriving at the net profit in accordance with the provisions of Part II and III of the Sixth Schedule to the Companies Act. Thus, it is necessary to see as to whether the debit of arrear depreciation is contemplated under the above mentioned provisions. Parts II and III of the Sixth Schedule to the Companies Act, 1956, relevant portion thereof reads as follows :
"Part II. Requirements as to profit and loss account
1. 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.
2. The profit and loss account-
(a) shall be so made out as clearly to disclose the result of the working of the company during the period covered by the account ; and
(b) shall disclose every material feature, including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of an exceptional nature.
3. The profit and loss account shall set out the various items relating to the income and expenditure of the company arranged under the most convenient heads ; and in particular, shall disclose the following information in respect of the period covered by the account--. . .
(iv) 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. . .
4A. The profit and loss account shall contain or give by way of a note a statement showing the computation of net profit in accordance with Section 349 of the Act with relevant details of the calculation of the commissions payable by way of percentage of such profits to the directors (including managing director) or manager, (if any) . . .
6. (1) Except in the case of the first profit and loss account laid before the company after the commencement of the Act, the corresponding amounts for the immediately preceding financial year for all items shown in the profit and loss account shall also be given in the profit and loss account . . .
Part III Interpretation :
7. (1) For the purpose of Parts I and II of this Schedule, unless the context otherwise requires,--
(a) the expression 'provision' shall, subject to Sub-clause (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 ; . . .
and in this Sub-clause the expression 'liability' shall include all liabilities in respect of expenditure contracted for and all disputed or contingent liabilities.
(2) Where--
(a) any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, not being an amount written off in relation to fixed assets before the commencement of this Act ; or
(b) any amount retained by way of providing for any known liability ;
is in excess of the amount which in the opinion of the directors is reasonably necessary for the purpose, the excess shall be treated for the purposes of this Schedule as a reserve and not as a provision."
13. Under Section 210(1) of the Companies Act, 1956, there is an obligation on the board of directors of a company to lay before the company at its general body meeting a balance-sheet and a profit and loss account. Section 211, Sub-section (1), thereof provides that every balance-sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and subject to the provisions of the said Section, shall be in the form set out in Part I of Schedule VI or in such other form as may be approved by the Central Government. It also provides that due regard shall be had, as far as may be, to the general instructions for preparation of balance-sheet under the heading "Notes" at the end of that part. So far as profit and loss account of a company also, Sub-section (2) of the said Section provides that it shall give a true and fair view of the profit or loss of the company for the financial year and shall, subject as aforesaid, comply with the requirements of Part II of Schedule VI so far as they are applicable thereto. Sub-section (5) of the said Section, inter alia, provides that the profit and loss account of a company shall not be treated as not disclosing a true and fair view of the state of affairs of the company, merely by reason of the fact that they do not disclose any matters which are not required to be disclosed by virtue of the provisions contained in Schedule VI or by virtue of a notification issued under Sub-section (3) or an order issued under Sub-section (4).
14. Now coming to Part II of the Sixth Schedule, Clause 2 provides that the profit and loss account shall be so made out as clearly to disclose the result of the working of the company during the period covered by the account and it shall also disclose every material feature regarding income and expenditure debited or credited. Clause 3 provides that the profit and loss account shall set out the various items relating to the income and expenditure of the company arranged under the most convenient heads and in particular, shall disclose the information in respect of the period covered by the account. One such information relevant for the purpose of this case is provided in Sub-clause (iv) thereof. It is regarding the amount provided for depreciation, renewals or diminution in the value of fixed assets. It further provides for disclosure of information regarding the method adopted for making such provision in case such provision is not made by means of a depreciation charge and further provides that 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} shall be disclosed by way of a note. Clause 4A provides that the profit and loss account shall contain or give by way of a note a statement showing the computation of net profits in accordance with Section 349 of the Companies Act with relevant details of the calculation of the commissions payable by way of percentage of such profits to the directors. Clause 6(1) provides that except in the case of the first profit and loss account laid before the company after the commencement of the Act, the corresponding amounts for the immediately preceding financial year for all items shown in the profit and loss account shall also be given in the profit and loss account. Clause 7(1)(a) contained in Part III provides that the expression "provision" shall, subject to Sub-clause (2) of Clause 7, mean any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, etc. Since Clause 3(iv) provides for disclosure, by way of a note, of the quantum of arrears of depreciation computed in accordance with Section 205(2) of the Companies Act in a case where no provision is made for depreciation, it is necessary to refer to the said provision also. Section 205 deals with dividend to be paid out of profits. Sub-section (1) of Section 205 provides that 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). For that purpose, Sub-section (2) provides for the mode of ascertainment of the depreciation. As per Clause (a) of Sub-section (2), the amount of depreciation shall be to the extent specified in Section 350. Clause (b) provides for an alternate mode of computation. Clause (c) also provides for any other mode approved by the Central Government. It has to be noted that the different modes provided under Sub-section (2) are optional and it is for the assessee to choose either the one or the other. If the assessee chooses to opt the mode provided under Clause (a), then the ascertainment of amount of depreciation is as provided in Section 350. Section 350, it must be noted, provides that the amount of depreciation to be deducted in pursuance of Clause (k) of Sub-section (4) of Section 349 shall be the amount calculated with reference to the written down value of the assets as shown in the books of the company at the end of the financial year at the commencement of this Act or immediately thereafter and at the end of each such financial year. So, in respect of an assessee who has opted for the mode of computation provided under Clause (a) of Sub-section (2), the amount of depreciation has to be calculated with reference to the written down value of the assets. In this context, it has also to be noted that prior to the amendment of the Companies Act made in 1988, whereby Schedule XIV was inserted and consequent amendment was made to Section 350 to the effect that "at the rate specified in Schedule XIV", the amount of depreciation for the purpose of Section 350 had to be computed in accordance with the provisions of the Income-tax Act and the Rules issued thereunder. Since Clause 4A of Part II of the Sixth Schedule and Section 350 of the Companies Act also referred to Section 349(4)(k) of the Act which, in turn, refers to Section 348 also, it will be profitable to refer to the two Sections also. Section 348 is a provision for remuneration of managing agents of a company. Sub-section (1) of Section 348 says that a company shall not pay to its managing agent in respect of any financial year beginning at or after the commencement of this Act, by way of remuneration whether in respect of his services as managing agent or in any other capacity any sum in excess of ten per cent. of the net profit of the company for that financial year. Here, we find reference to the expressions "net profits" and the remuneration of the managing agent is geared to a percentage of the net profit. Section 349 provides for determination of net profits for the purpose of Section 348, where Sub-section (4)(k) provides that in making the computation of net profit, depreciation to the extent specified in Section 350 shall be deducted. In this background, we will go back to the provisions of Part II of the Sixth Schedule to the Companies Act to understand as to what are all the components of the profit and loss accounts for arriving at the net profit contemplated in the Explanation to Section 115J of the Act. Clause 2 of Part II only provides that the profit and loss account shall be so made out as clearly to disclose the result of the working of the company during the period covered by the account and to disclose every material feature regarding credits or receipts and debits or expenses. Clause 3(iv) provides for the disclosure of the information regarding the amount provided for depreciation. From the further provisions of Clause 3(iv) it would appear that the provision for depreciation need not be made a charge against the profit of that year. What is required is to make a note of the method adopted for making the provision, if any, such provision is made and in a case where no provision is made for depreciation, to state the said fact and to work out the quantum of arrears of depreciation in accordance with Section 205(2) of the Companies Act and to disclose it by way of a note. A cumulative reading of the aforesaid provisions of Part II would show that it is not at all necessary, even if a provision for depreciation is made in the profit and loss account, to make depreciation a charge against the profits of that year. It would further show that it is not obligatory that a provision is made for depreciation. What is required is only to show the method adopted for making the provision for depreciation and in a case where no provision is made, to state so and to show the quantum of arrears of depreciation computed in accordance with Section 205(2) of the said Act by way of a note. Though Part II of the Sixth Schedule deals with the preparation of the profit and loss account, we are more concerned with the net profit as per the profit and loss account prepared in accordance with Part II. In other words, we are more concerned with the items which can be legitimately made a charge against the profits in the profit and loss account. We have already pointed out that under Clause 2 of Part II it is the result of the working of the company during the period covered by the account that is material. In that context, Clause 3(iv), which refers to "the amount provided for depreciation", can only mean the amount of that year's depreciation, i.e., current depreciation. This will be further clear from the provisions of Section 205(2) read with Section 350 and consequently from Sections 348 and 349 of the Companies Act. Section 205(2), as already stated, provides for the various modes for ascertainment of depreciation. Whatever mode provided therein is adopted, it is only the amount calculated under the said mode that can be shown as a provision for the purposes of determining the profit of that year. This is further clear from the provisions of Section 348 read with Section 349(4)(k) of the Companies Act. As pointed out earlier, Section 348 refers to net profits (of course, for the purpose of determining the managerial remuneration) and Section 349(4)(k) mentions the quantum of the amount to the extent provided in Section 350. The computation of depreciation, as already stated, can be made only in one of the modes provided in Section 205(2) of the said Act. These provisions also go to show that the depreciation that can be made a charge against profits in the profit and loss account prepared in accordance with the provisions of Parts II and III of the Sixth Schedule, can only be the amount specified in Section 205(2). In other words, Parts II and III of the Sixth Schedule do not enable to make a provision for making arrears of depreciation a charge against profits of that year. In this connection, it has to be noted that the provision in Clause 3(iv) of Part II is to the effect that the quantum of arrears of depreciation computed in accordance with Section 205(2) of the said Act, shall be disclosed by way of a note, which is only for the purpose of noting the financial stability of the company at a point of time and not for the purposes of making it a charge against the profits of any accounting period. Clause 4A also provides that the profit and loss account shall contain a statement showing the computation of net profit in accordance with Section 349 of the Companies Act. There also, as already mentioned, deduction of only current year's depreciation is contemplated. This is for the purpose of determining the managerial remuneration provided under Section 349. On a conspectus of the provisions of Parts II and III of Schedule VI and the provisions of Sections 205(2), 348, 349 and 350 of the Companies Act, we are of the view that the profit and loss account prepared in accordance with the provisions of Parts II and III mentioned above do not contemplate making of a provision for arrears of depreciation either separately or along with the current year's depreciation to be a charge against the profit of that year. Notwithstanding the above understanding of the provisions for arriving at the net profit contemplated in the first part of the Explanation, we will deal with the contention of the assessee regarding the adjustment of arrear depreciation worked out by the assessee pursuant to the introduction of Schedule XIV to the Companies Act with effect from April 2, 1987, based on the Guidance Notes on accounting for depreciation in companies issued by the Institute of Chartered Accountants of India, New Delhi (annexures E and G), and the communication issued by the Department of Company Affairs on October 21, 1991 (annexure-D-2).
15. As noticed earlier, Section 211 of the Companies Act providing for the form and contents of balance-sheet and profit and loss account, Sub-sections (1) and (2) thereof state that the said documents shall give a "true and fair view" of the profit or loss of the company for the financial year while complying with the requirements of Part II of Schedule VI. The expression "true and fair view" has not been defined in the Companies Act. However, it casts an obligation on those who are in charge of the company's affairs to ensure that a true and fair view of the state of affairs is reflected in its accounts. The consideration for the said view is stated in Ramaiya's Guide to the Companies Act, twelfth edition (1992), at page 963 as follows ;
"One, in their fiduciary capacity as agents, they have an obligation to report, and two, full and frank disclosure of information to enlighten the users of the accounts in the latter's decision-making."
16. According to the assessee, here comes the crucial role of the accountancy profession. It is in that context the assessee relies on the Guidance Note on Accounting for Depreciation in Companies issued by the Institute of Chartered Accountants of India (I.C.A.I.). It is stated that the I.C.A.I. from time to time issues guidance in the form of instructions to its members and they have issued Guidance Note on Accounting for Depreciation in Companies. It is also stated that the Accounting Standards Board (ASB) and the Auditing Practices Committee (APC), which are the various committees of the I.C.A.I, also issued accounting standards and statements on standard auditing practices from time to time. It is further stated that the objectives behind these statements and accounting standards issued by the I.C.A.I., A.S.B. and A.P.C., are to ensure to the extent possible that a true and fair view of the state of affairs of the company is made available to the users of that information. It is pointed out that the aforesaid Guidance Notes can be considered by the authorities and courts for resolution of the dispute in this case. In support of the said stand, counsel for the assessee relied on the decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, where the Supreme Court had to deal with a question as to whether interest paid before the commencement of production by the appellant-company, on the amounts borrowed by it for the acquisition and installation of plant and machinery, would form part of the "actual cost" of the assets to the appellant within the meaning of that expression in Section 10(5) of the Indian Income-tax Act, 1922, and as to whether the assessee would be entitled to deprecation and development rebate with reference to such interest also. The Supreme Court resolved the said question by drawing guidance from recognised normal accountancy practices prevalent in commerce and industry and the principles explained in Accountancy Books including the guidelines issued by the I.C.A.I., on the audit of accounts. The Supreme Court resorted to the above in the absence of a definition of the expression "actual cost" in the 1922 Act. It is by drawing analogy from the said decision, the assessee submitted, that in the absence of a definition of the expression "true and fair view", the assessee was perfectly justified in relying on the Guidance Note issued by the I.C.A.I. for its members who are in charge of auditing and certifying company accounts each year.
17. In this case, the assessee mainly relies on AS-6 regarding depreciation in accounting issued by the I.C.A.I. AS-6, paragraph 3.1, states that "depreciation" is a measure of the wearing out, consumption or other loss of value of depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes, that depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset and that depreciation includes amortisation of assets whose useful life is predetermined. Clause 4 states that the depreciation has a significant effect in determining and presenting the financial position and results of operations of an enterprise and that the same is charged in each accounting period by reference to the extent of the depreciable amount, irrespective of an increase in the market value of the assets. Referring to the various aspects involved in the assessment of depreciation and the amount to be charged thereof in an accounting period, in paragraph 113 it is stated that the quantum of depreciation to be provided in an accounting period involves the exercise of judgment by management in the light of technical, commercial, accounting and legal requirements and accordingly may need periodical review and that if it is considered that the original estimate of useful life of an asset requires any revision, the unamortised depreciable amount of the asset is charged to revenue over the revised remaining useful life. It is also stated that alternatively, the aggregate depreciation charged to date is recomputed on the basis of the revised useful life and the excess or short depreciation so determined is adjusted in the accounting period of revision. Paragraphs 17 to 20 deal with disclosure. Paragraphs 21 to 30 deal with accounting standard. Paragraph 22 provides that the depreciation method selected should be applied consistently from period to period and that a change from one method of providing depreciation to another should be made only in the following circumstances :
(1) if the adoption of the new method is required by the statute ; or (2) if the new method is required for compliance with an accounting standard ; or (3) if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements of the enterprise.
18. It also provides that when a change in the method of depreciation is made, the unamortised depreciable amount of the asset should be charged to revenue over the remaining useful life by applying the new method and further, such a change should be treated as a change in the accounting policy and its effect should be quantified and disclosed.
19. It would appear from the Guidance Note, AS-5 and AS-6 particularly from the paragraphs mentioned above that prior year depreciation can be separately provided in the profit and loss account and can be made a charge against the profit of the year along with the current year's depreciation. The reason stated is that this is required to have a true and fair account of the financial position of the company for the use of the public. But it is relevant to note that this accounting policy can be adopted only in a case where paragraph 22 of AS-6 mentioned above is attracted. Regarding the position as to whether a company, which follows the straightline method specified in Section 205(2)(b) of the Companies Act, can also provide for depreciation in respect of extra or multiple shift allowance, the Guidance Note issued by the I.C.A.I, is not very clear. It is stated in the Guidance Note that it has come to the notice of the council of the I.C.A.I. that certain companies are not providing depreciation in respect of extra or multiple shift allowance and that some companies are writing back depreciation in respect of extra or multiple shift allowance provided in the past years under Section 205(2)(b) of the Companies Act. The council noted that this practice is not in accordance with the recommendations made in the Note on "provision for depreciation" issued by the Research Committee of the I.C.A.I. In such circumstances, the Research Committee was requested to express its opinion with regard to the correct charge for depreciation in so far as the accounts of a company are concerned and in so far as it is required to exhibit a true and fair view of the state of affairs of the company as on a given date and of the profit or loss for the year. It is seen from the Note that the question which has been referred for consideration of the Research Committee is whether it is obligatory on-a company to provide for depreciation only on the basis mentioned in Section 350 or in Section 205(2) of the Act or whether these bases can be considered as indicating the minimum depreciation which must be provided by the company. The Research Committee opined that it is open to a company to provide for depreciation either on the written down value method or on the straightline basis, that the method adopted for providing the depreciation should be disclosed in the accounts, that in arriving at the rates at which the depreciation should be provided, the company must consider the true commercial depreciation, i.e., the rate which is adequate to write off the asset over its normal working life and that if the rate so arrived at is higher than the rates prescribed under Section 350 or Section 205(2), the company should provide depreciation at such higher rate but if the rate so arrived at is lower than the rate mentioned in the above quoted sections, then the company should provide depreciation at the rates mentioned in those sections, since these represent the minimum rates of depreciation to be provided. The Research Committee also opined that, where for the purposes of Section 350 or Section 205(2) income-tax rates are adopted, the rates to be considered are the normal rates together with the allowance for extra shift working.
20. It is seen that the Appellate Tribunal has also relied on the letter dated September 24, 1991 (annexure-Dl), sent by the assessee and the reply dated October 21, 1991 (annexure-D2), sent by the Secretary, Company Law Board, for taking the view that the arrear depreciation can be debited in the profit and loss account of the year in question for arriving at the net profit of that year. It has not been brought to our notice any provision in the Companies Act authorising the Company Law Board to give any opinion in relation to any individual case or otherwise in the nature given in annexure-D2. We also could not see any provision in the Companies Act enabling the Company Law Board to issue such a communication. That apart, there is absolutely nothing to show that the Company Law Board had considered the relevant provisions of the Companies Act regarding the preparation of balance-sheet in accordance with the provisions of Parts II and III of the said Act. Except to say that the computation of net profit by charging arrears of depreciation for the earlier years also in the profit and loss account of the company for the period ended October 31, 1987, is in accordance with the provisions of Section 205 of the Companies Act, 1956, read with Parts II and III of the Sixth Schedule to the Companies Act, absolutely no reasons for arriving at the said conclusion had been stated. We are of the view that in the absence of a statutory provision enabling the Company Law Board to issue such directions, any opinion expressed by the Company Law Board cannot have any legal efficacy or any value in .arriving at the net profit as per the profit and loss account prepared as above.
21. Now, we will consider the relevance and/or the application of the Guidance Note issued by the I.C.A.I. mentioned above with reference to the factual situation of this case. Extract of the profit and loss account and balance-sheet for the year ended October 31, 1987, produced as annexure-H2 at page 183 under the head "Expenditure", gives the details of depreciation as follows :
"Depreciation (Note 7, Gross Rs. 4,17,20,438 Less : Transferred from revaluation reserve Rs. 15,44,122-1986 Rs. Nil)-Rs. 4,01,76,316."
22. It can also be seen that profit before taxation for the year is arrived at Rs. 14,52,30,357. It is seen that thereafter provision for taxation of Rs. 16,00,000 and depreciation relating to earlier years Rs. 13,66,39,051 are deducted to arrive at the net profit of Rs. 69,91,306. In Schedule 12-Notes on Accounts of the profit and loss account at page 191 of the paper book under item No. 7 it is stated as follows :
"Depreciation for the year has been provided in the accounts in accordance with the provisions of Section 205(2)(b) of the Companies Act, 1956, taking into consideration extra shift allowances, where applicable. Consequent on the above, a sum of Rs. 1,366.39 lakhs being additional depreciation for the earlier years has been debited to the profit and loss account. Had the company followed the practice as in the previous year the profit for the year would have been higher by Rs. 120.44 lakhs (net)."
23. In this context, it is also relevant to note that in the profit and loss account for the year ended October 31, 1986 (annexure-H1, at page 158 of the paper book) profit for the year is arrived at after deducting depreciation of the current year and thereafter a deduction for depreciation relating to earlier years is seen made. In the Note to the said profit and loss account at page 167, item No. 7 reads as follows :
"7. The depreciation for the year has been computed under Section 205(2) of the Companies Act based on ;
(a) The legal view that extra shift allowances need not be considered under straightline method under Section 205(2)(b) of the Companies Act in respect of the plant and machinery ;
(b) Company Law Board clarification that depreciation on additions to assets during a year need be computed on pro rata basis from the date of addition ;
(c) Clarification issued in circular dated May 21, 1986, by the Department of Company Affairs in respect of application of the revised rates of depreciation under the amended Income-tax Rules in respect of various assets ;
(d) Reclassification of certain items of plant under the main head 'Plant and machinery'.
A sum of Rs. 1,267.60 lakhs representing depreciation provided in the accounts for earlier years in excess of the amount required to be provided as recomputed on the above basis has been adjusted in arriving at the depreciation relating to earlier years debited to the profit and loss account.
Had the company followed the practice adopted in previous years the charge of depreciation would have been higher by Rs. 31.27 lakhs. The extra shift depreciation not provided as per (a) above for the period up to October 31, 1986, amounts to Rs. 1,948 lakhs including Rs. 127 lakhs for the year."
24. It can be seen further from the letter dated September 24, 1991 (annex-ure D-1), sent by the assessee-company to the Secretary, Department of Company Affairs (extracted in the appellate order of the Tribunal at pages 60 and 61 of the paper book), that while the company has been providing depreciation and appending necessary notes for arrears of depreciation in earlier years, company, in its profit and loss account for the captioned year, provided full depreciation for the relevant year as also balance of arrears of depreciation relating to earlier years and also referred to Note 7 to the profit and loss account for the year in question and requested to confirm as to whether as a consequence of provision of depreciation in terms of Section 205(2)(b), company's net profit of Rs. 69.91 lakhs in accordance with Parts II and III of Schedule VI to the Companies Act. In reply to the said communication, the Company Law Board observed that the depreciation charged by the company for the relevant year, namely, October 31, 1987, and also the charging of the arrears of depreciation for earlier years in the profit and loss account of the company for the period October 31, 1987, is in accordance with the provisions of Section 205 of the Companies Act, 1956, read with Parts II and III of Schedule VI to the Companies act, 1956, and, therefore, the profit arrived at after the charging of such depreciation and arrears of depreciation in respect of the earlier years, appears to be in accordance with the provisions of the Companies Act, 1956. From the modus operandi adopted by the company for debiting the arrears depreciation for the prior years as discussed above, it would show that the company in fact did not change the method of computation of depreciation provided in Section 205(2) of the Companies Act. In other words, the company continued to compute the amount of depreciation as per the method provided under Section 205(2)(b), viz, straight-line method and in addition to the same, calculated depreciation on the basis of extra-shifts worked by the company on its plant and machinery from the date of acquisition of its original assets. According to us, this is' not a matter covered by the Guidance Note contained in AS-5 or AS-6. This practice adopted by the assessee during the- year in question cannot also be considered as permissible under the Guidance Note issued by the I.C.A.I. under the head "Provision for depreciation in respect of extra or 'multiple shift allowance" occurring in pages 122 to 124 of the paper book produced as annexure-F which we have already mentioned above. This is further clear from the view expressed by the Research Committee of the I.C.A.I. to the effect that where for the purposes of Section 350 or Section 205(2) income-tax rates are adopted, the rates to be considered are the normal rates together with the allowance for extra shift working. It must be noted that the reference to Section 205(2) there can only be with reference to Clause (a) thereof, which refers to Section 350 and not with respect to Clause (b) or Clause (c) of Sub-section (2) of Section 205.
25. We will also consider the significance of the amendment to the Companies Act particularly Section 350 and the introduction of Schedule XIV for the said purpose. It can be seen from Schedule XIV itself that there is reference to Sections 205 and 350. That is for the reason that Clause (a) of sub-section (2) of Section 205 requires the application of Schedule XIV in view of Section 350. In this context, it has to be noted that prior to the amendment of Section 350 of the Companies Act, 1956, by the Companies (Amendment) Act, 1988, with effect from June 15, 1988, the position was that the rate of depreciation under Section 350 was as provided under the Indian Income-tax Act, 1922, and the Rules made thereunder. As per the Rules issued under the Income-tax Act, as it stood at the relevant time, the assessee could have provided for depreciation including therein extra and multiple shift allowances. Since the company did not adopt the method provided under Clause (a) of Section 205(2) of the Companies Act, the income-tax rates regarding depreciation did not apply. As already stated, the amendment of the Companies Act made in 1988 deleted that portion of Section 350 which provided for computation of the depreciation at the rates prescribed in the income-tax Act and the Rules issued thereunder as above and substituted the words "at the rate specified in Schedule XIV". It has to be noted that though the amendment was made on May 24, 1988, Schedule XIV was given effect from April 2, 1987, for the reason that the Income-tax Rules was also amended with effect from the said date. But it has to be noted that though Schedule XIV is given retrospective effect from , April 2, 1987, amendment to Section 350 was effective only from June 15, 1988. Schedule XIV comes into play only by virtue of Section 350 of the Act. We have stated all these only to show that the amendment made to the Companies Act has no relevance so far as a company which is following the method of computation of depreciation as provided under Section 205(2)(b) of the Companies Act. In other words, the amendment of the provisions of Section 350 and the introduction of Schedule XIV have relevance only in so far as companies which follow the method of computation of depreciation provided under Clause (a) of Section 205(2) of the said Act. Rightly, the company is also not adopting the rates provided in Schedule XIV. What the company has done is only to calculate the depreciation under Clause (b) of Section 205(2) drawing analogy from Schedule XIV, viz., providing depreciation both under straightline method and for extra shifts by the mode prescribed in the Schedule. This, according to us, is not sanctioned by any of the guidelines issued by the I.C.A.I, or its Committees. According to us, this method of computation of depreciation for all the earlier years and to lump it for adjustment against the profit of the current year, is not contemplated for arriving at the net profit in the profit and loss account prepared as per Parts II and III of Schedule VI to the Companies Act. It would appear that this practice of computation of depreciation for the current year was accepted by the authorities from the facts that the sum of Rs. 4,17,20,438 computed as depreciation by the assessee in the profit and loss account is seen accepted by the assessing authority and from the fact that a sum of Rs. 4,00,91,301 is seen deducted which has not been interfered with by the first appellate authority. For these reasons, we are of the view that the guidance notes issued by the I.C.A.I also are of no assistance to the assessee for making deduction of the sum of Rs. 13,66,39,051 in the computation of net profits as per the profit and loss account prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act.
26. Now we will go to the next step in the computation of book profit. As stated earlier in this judgment, the first step under the Explanation to Section 115J is to arrive at the net profit. Once the net profit is arrived at from the profit and loss account prepared in accordance with the provisions of Parts II and III of the Sixth Schedule to the Companies Act, the next step is to make the adjustments provided in Clause s (a) to (f) and (i) to (iii) of the said Explanation. The net profit arrived at as above will have to be increased by the income-tax paid or payable or the provisions thereof, amount carried to any reserve, provision made for liabilities other than ascertained liabilities, provision for losses of subsidiary companies or the amount or amounts of dividends paid or proposed and the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies. These additions to the net profit can be made only if the amounts mentioned above are debited to the profit and loss account. The amount so arrived at has to be reduced by the amounts withdrawn from reserves or the amount of income to which any of the provisions of Chapter III applies ; both, only in a case where the said amounts are credited to the profit and loss account. Clause (iii) of the Explanation, which is the crucial clause so far as the main dispute in this case is concerned, provides for the reduction of the amount of any brought forward losses or unabsorbed depreciation, whichever is less, as computed under the provisions of Section 205(l)(b) of the Companies Act, 1956, for the purposes of declaration of dividends. It is necessary to note at this point that there is no controversy or dispute with regard to the adjustments contemplated under Clauses (a) to (f) or under Clauses (i) and (ii) of the Explanation. The controversy/dispute is only with regard to the scope and content of Clause (iii) above. Before considering the said question, it is necessary to have a little more background of the introduction of the provisions of Section 115J. We have already pointed out earlier that prior to the introduction of Section 115J by the Finance Act, 1987, with effect from April 1, 1988, there was a provision applicable to all companies regarding the quantum of deductions in respect of certain reliefs provided under the Act introduced by the Finance Act of 1983, with effect from April 1, 1983, i.e., Chapter VI-B, Section 80WA. Under Sub-section (1) of Section 80WA, in the case of companies where the aggregate amount of deduction admissible under the provisions of Sub-section (2) mentioned above exceeded seventy per cent. of the total income computed before making such deductions, the amount to be deducted under those provisions was restricted to seventy per cent. of the total income as computed before making such deductions. Sub-section (2) of Section 80VVA specified the provisions regarding various deductions allowable to a company under the Act. This provision itself was enacted, as could be seen from the Budget Speech Of the Finance Minister for the financial year 1983-84, with a view to securing that the various deductions in respect of tax concessions admissible under the Income-tax Act did not result in reducing the taxable income of companies to the extent that no tax or only a negligible tax would be payable by profit-making companies. The object and background, under which Section 115J came to be enacted, is stated by the Andhra Pradesh High Court in V. V. Tram-Investments (P.) Ltd. v. CIT [1994] 207 ITR 508, at page 532, as follows :
"Section 115J was introduced in the assessment year 1988-89. Prior to the insertion of this provision, Section 80WA provided for payment of tax on at least thirty per cent. of the income. Studies carried out by the Central Board of Direct Taxes revealed that while the provisions of Section 80WA had the effect of subjecting companies to minimum tax which they would have otherwise not paid, there were still companies which had no income-tax liability despite substantial profits, on account of the fact that companies were availing of depreciation in full under the Income-tax Act. Therefore, despite Section 80WA, the phenomenon of prosperous zero tax companies continued. A study carried out by an economic journal in regard to the performance of 650 top companies during the assessment year 1984-85 showed that out of the top 23 profit-making companies, the profit and loss accounts of 12 companies showed no income-tax liability though they had profits and had declared dividends. About 28 per cent, of the companies (139 companies) accounting for a net profit of Rs. 274 crores showed no tax liability. Therefore, Section 80WA had become otiose. Therefore, the necessity to introduce the impugned provision, viz., Section 115J, arose in order to tackle the problem of zero tax prosperous companies to ensure minimum corporate tax by suitably modifying Section 80WA. With the avowed object of bringing the zero tax prosperous companies within the taxable net, Section 115J has been enacted."
27. Circular No. 495, dated 22nd September, 1987 ([1987] 168 ITR (St.) 87, 110), issued by the Central Board of Direct Taxes also explains the scope and object of the new provision.
28. It must be noticed from the provisions of Clause s (a) to (f) and Clause s (i) and (ii) of the Explanation that it was in the contemplation of the Legislature while mentioning about the preparation of the profit and loss account in accordance with the provisions of Parts II and III of the Sixth Schedule for arriving at the net profit that the companies may debit the amounts specified in those Clause s in the profit and loss account for arriving at the net profit. It can also be discerned that the intention of the Legislature was not to allow the said deductions while computing the "book profit" for the purposes of the Section. But when it came to the provisions of Clause (iii) of the Explanation, the Legislature did not say that the deduction provided under the said clause can be made only if such amount is credited to the profit and loss account. It would appear from the above, especially in view of the provisions of Clause s (a) to (f) and Clause s (i) and (ii) which provide for addition or reduction only in case of debit or credit of the said amounts in the profit and loss accounts, that the Legislature's intention was that the provision for unabsorbed loss or unab-sorbed depreciation is not an item for debit in the profit and loss account prepared in accordance with the provisions of Parts II and III of the Sixth Schedule. It would further appear that it is for that reason that the Legislature wanted to make a deduction of an amount equivalent to the amount of loss or the amount of depreciation, whichever is less, for arriving at the book profit. It is also worthwhile to refer to the observations made by the Delhi High Court in National Thermal Power Corporation Ltd. v. Union of India [1991] 192 ITR 187. That was a case filed under article 226 of the Constitution of India challenging the provisions of Section 115J of the Act. While dismissing the writ petition, Justice B. N. Kirpal (as his Lordship then was) observed (p. 188) :
"This provision, namely, Section 115J, was brought in the statute book in an effort to tax what is commonly known as 'zero tax companies'. These are companies which have, in fact, large profits in its books but, for the purpose of the Income-tax Act, by virtue of various deductions which have been claimed, very little taxable income is disclosed. It is in an effort to bring such types of companies within the taxable net that Section 115J was inserted by Parliament. We are unable to agree with learned counsel for the petitioner that this provision is violative of articles 14 and 19 of the Constitution."
29. Now we will consider the provisions of Clause (iii) of the Explanation to Section 115J, which reads as follows :
"(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."
30. Since the said clause reads into it the provisions of Clause (b) of the first proviso to Sub-section (1) of Section 205 of the Companies Act, 1956, it is necessary to refer to that provision also, which reads as follows ;
"(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 ;"
31. In order to have a full picture of the scope of the provisions of Clause (b) of the first proviso to Sub-section (1), it will be useful to refer to the provisions of Section 205(1) and Clause (a) of the first proviso also, which read as follows :
"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-
(a) if the company has not provided for depreciation for any previous financial year or years which falls or fall after the commencement of the Companies (Amendment) Act, 1960, 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 years ;"
32. It is to be noted that Clause (iii) of the Explanation extracted above shows that the provisions of Clause (b) of the first proviso to Sub-section (1) of Section 205 of the Companies Act, 1956, are made applicable for the purposes of determining the amount of deduction under Clause (iii). In other words, the provisions of Clause (b) of the first proviso to Sub-section (1) of Section 205 of the Companies Act, 1956, have been read into Clause (iii). It is necessary, therefore, to consider as to what exactly the Legislature means when it says 'as if the provisions of Clause (b) of the first proviso to Sub-section (1) of Section 205 of the Companies Act, 1956, is applicable'. Does it mean Clause (b) in its entirety is to be applied or only to the extent required for effectuating the object of Clause (iii) of the Explanation ? Clause (iii) provides for deduction of 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. If the clause ends there, there would not have been any difficulty. The loss means 'business loss' and the loss required to be set off may include carried forward loss also subject to the limitations contained in Section 72 of the Act. Likewise, the amount of depreciation required to the set off is the unabsorbed depreciation of the earlier years along with the current year's depreciation as provided in Section 32(2) of the Act. The word 'or' used in Clause (iii) could have been read as 'and' thereby either 'loss' or depreciation and in cases where there is loss as well as depreciation both could have been deducted. But the clause does not stop there. It says 'as if the provisions of Clause (b) are applicable'. If clause (b) is to be applied independently, then the company should have incurred a 'loss' in any previous year or years in which case either 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 can be set off against the profits of the year in question. It also provides for calculation of the depreciation for the said purpose in accordance with Section 205(2) of the Companies Act. So, in a case where Clause (b) applies there is a requirement of computation of depreciation in accordance with Section 205(2) above. As already stated, Section 205(2) is the charging Section so far as depreciation is concerned and it provides for three or four modes of computation of depreciation and the option is given to the assessee to choose one or the other modes. Here the question is, regarding the scope of the expression 'loss', as to whether it includes depreciation also or if the loss is solely on account of depreciation, can it be treated as loss for the purposes of Clause (b). In the context in which the expression 'loss' is used in clause (b), it cannot be said to include 'depreciation'. The clause refers to 'loss' and an amount equal to depreciation that too whichever is less. It is for the purposes of demonstrating that the expression 'loss' in Clause (b) does not take in depreciation we have extracted the provisions of Clause (a) of the first proviso to Section 205(1) also. Clause (a) of the first proviso to Section 205(1) specifically states that if the company has not provided for any depreciation for any previous financial year or years which falls or fall after the commencement of the Companies (Amendment) Act, 1960, 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 years. From the above it would appear that Clause (b) of the first proviso to Sub-section (1) of Section 205, when it says 'if the company had incurred any loss' and also 'then, the amount of the loss', the expression 'loss' occurring therein can mean only 'loss' excluding 'depreciation', for, Clause (a) mentioned above had already provided for depreciation. If the expression 'loss' in Clause (b) of the proviso is understood as including depreciation also, then it will result in double deduction of the amount of depreciation for purposes of Section 205(1) of the Companies Act. Take the case of the assessee itself. The asses-see had provided depreciation for the earlier years only at the SLM rates and did not provide for extra shifts worked. Assume that the assessee was entitled to provide for that also in those years. If the assessee is to declare 'dividend' from the profit for the year 1988-89, in view of the provisions of clause (a) of the first proviso, it has to calculate the depreciation for the earlier years and provide the same for adjustment against the profit of 1988-89. Then if the 'loss' referred to in Clause (b) includes 'depreciation' also and if the loss is only on account of the unabsorbed depreciation, then the very same amount which has already been considered under Clause (a) has to be adjusted again. According to us, Clause (b) of the first proviso does not contemplate such a situation, for, the Legislature cannot be attributed with such an intention of double deduction. It would appear from a conjoint reading of Clause (iii) of the Explanation and Clause (b) of the first proviso to Section 205(1) that Clause (b) has been made applicable only for the computation of depreciation in accordance with the provisions of Section 205(2) and for the purpose of taking the lesser of the two. Then the scheme of Clause (iii) will be clear which is to the following effect : The business loss (i.e., loss excluding depreciation) or the amount of depreciation for the year or years computed in accordance with Section 205(2) whichever is less, is to be deducted under Clause (iii). This interpretation is consistent with the scheme of the Income-tax Act also. We have already extracted the object of introduction of Section 115J discussed in the decisions of the Andhra Pradesh High Court and Delhi High Court mentioned earlier. There it was noticed that in spite of the restrictions on deductions imposed by Section 80WA, the result turned out to be unproductive and hence Section 115J was introduced to make prosperous companies which are zero tax companies under the provisions of the Act liable to pay some tax for the development of the country. If that is the object, the 'loss' referred to in Clause (iii) can never mean loss including depreciation, If the view that 'loss' includes depreciation also is taken, the very purpose of the Section can be defeated. We are, therefore, of the view that the 'loss' mentioned in Clause (iii) of the Explanation to Section 115J does not include depreciation. This is the position with regard to the expression ''loss' mentioned in Clause (b) of the first proviso to Sub-section (1) of Section 205 of the Companies Act also. We are also of the view that unless there is 'loss' as understood above in any year, there is no scope for the application of Clause (iii) of the Explanation.
33. The view taken by us as above, viz., the expression "loss" used in Clause (iii) does not include depreciation, is supported by the decision of the Andhra Pradesh High Court in V. V. Tram-Investments (P.) Ltd. v. CIT [1994] 207 ITR 508. That was a case where the Andhra Pradesh High Court considered the reference along with eight batch of writ petitions challenging the provisions of Section 115J. One of the questions referred for the decision of the High Court was as to whether the Appellate Tribunal was justified 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 "including depreciation" ? In that case, the first year of assessment of the company was 1987-88. During that year there was a profit. In the assessment year 1988-89, there was a profit of Rs. 35,79,997 before depreciation and the depreciation debited to the profit and loss account was Rs. 67,75,759. Thus, the net result after adjusting depreciation was a loss to the tune of Rs. 31,95,762. For the assessment year 1989-90 there was a current year's profit of Rs. 28,37,947. The asses-see-company filed its return of income disclosing "nil" income after setting off a part of arrears of depreciation against the current year's profit of Rs. 28,37,947. The Income-tax Officer, however, computed the book profit under Section 115J of the Income-tax Act at Rs. 8,51,380, being 30 per cent. of the current year's profit of Rs. 28,37,947 as per the profit and loss account. According to the Income-tax Officer, for arriving at the adjusted book profit, unabsorbed depreciation or business loss, whichever is less, is to be adjusted and since there was no business loss in earlier years as per the books of account, the amount to be set off was considered as "nil", whereas the assessee contended that earlier years' loss of Rs. 31,94,136, which in fact was unabsorbed depreciation, was to be deducted from current year's profit of Rs. 28,37,947, before arriving at the book profit. The view taken by the Assessing Officer was confirmed by the first appellate ' authority and by the Tribunal. It is in these circumstances the question mentioned earlier came up for consideration before the High Court. The Andhra Pradesh High Court first considered the effect of the reference to Parts II and III of Schedule VI and Section 205(1), first proviso, Clause (b) of the Companies Act in the Explanation to Section 115J and observed that the effect of this legislative method would amount to incorporation by reference of the provisions of Parts II and III of Schedule VI and Section 205(1), first proviso, Clause (b) of the Companies Act. The court, relying on the decisions of the Supreme Court in Bolani Ores Ltd. v. State of Orissa AIR 1975 SC 17, Mahindra and Mahindra Ltd. v. Union of India [1979] 49 Comp Cas 419 (SC) and Onkarlal Nandlal v. State of Rajasthan [1985] 4 SCC 404 ; AIR 1986 SC 2146, all dealing with the effect of such reference, further observed at page 531 of 207 ITR as follows ;
"From the above, it followed that the provision of an enactment can be incorporated into another enactment by reference. If such an incorporation is made, it is not necessary to refer to the parent Act from which the provision is borrowed. It is to be incorporated as if the provision is made in the enactment where it is incorporated. We have already referred to Clause (iv) under the Explanation to Section 115] of the Income-tax Act. In view of the law laid down by the Supreme Court, it is an instance of legislation by incorporation. In other words, Section 205(1)(b) of the Companies Act is actually written in Clause (iv) under the Explanation to Section 115} of the Income-tax Act and, therefore, there is no occasion to refer to the Companies Act, 1956, at all.
Therefore, while construing the provision of Section 115J of the Act, there is no need to refer to the provision of Section 205(1), first proviso, Clause (b) of the Companies Act from which the provision in Section 115} is borrowed and we must proceed to apply the provision of Section 115J of the Income-tax Act, as if Section 205(1), first proviso, Clause (b), of the Companies Act was written out verbatim in Section 115J of the Income-tax Act. In other words, when once the provision under Section 205(1), first proviso, Clause (b) is incorporated in Clause (iv) of the Explanation to Section 115J of the Income-tax Act, it is only the said provision that is so incorporated that has to be looked into for the purpose of interpreting the scope and ambit of Clause (iv) under the Explanation to Section 115J."
34. Thereafter, the said court considered the scope of Clause (iv) of the Explanation (clause (iii) at the relevant time). The court, after considering the object and background of introduction of Section 115J and the concepts of "loss" and "depreciation" under the Act particularly with reference to the provisions of Sections 32 and 70 to 73 of the Act, took the view that the assessee is entitled to deduct depreciation or loss, whichever is less, only when in a given year there is loss as well as depreciation and in such a case, the lesser of the amounts will be allowed to be deducted as per the provisions of the Income-tax Act. It was also observed that in case there is profit in a year, but after adjustment of depreciation, it results in loss, no adjustment in the book profit under Section 115J can be allowed. The court further observed that the interpretation of "loss" and "depreciation" for the purpose of declaring dividend under the Companies Act, 1956, is irrelevant and their interpretation under Clause (iv) of the Explanation to Section 115J of the Act should be in accordance with the provisions of the Income-tax Act. The court also observed that it may be that under the Companies Act the "unabsorbed depreciation" may be included in the "unabsorbed loss", i.e., for the purpose of declaring the net loss or net profits but as per the Income-tax Act "unabsorbed loss" need not always include "unabsorbed depreciation" or "current depreciation" since both the losses, unabsorbed loss, current depreciation and unabsorbed depreciation have been dealt with under the Income-tax Act distinctly while adjusting the income, The court in that regard referred to the decisions of the Supreme Court in Garden Silk Weaving Factory v. CIT [1991] 189 ITR 512 and CIT v. Mother India Refrigeration Industries (P.) Ltd. [1985] 155 ITR 711 and observed that the view expressed by the Larger Bench in Mother India Refrigeration's case [1985] 155 ITR 711, supports the above view. The Andhra Pradesh High Court finally held that the computation to be made for the purpose of declaring dividend under the Companies Act cannot be adopted for the purpose of computing the taxable income under the provisions of the Income-tax Act and that for the purpose of Section 115J of the Act, "loss" does not include "unabsorbed depreciation".
35. The scope of the expression "loss" used in Explanation (iii) to Section 115J came up for consideration before the Madhya Pradesh High Court also in Bhilai Wires Ltd. v. CIT [1998] 231 ITR 288. The appellant-company in that case filed a return (revised return) with a computation of income under Section 115J of the Act showing the book profit at Rs. 8,30,178 and declared the income at 30 per cent. of the above amounting to Rs. 2,49,053. The Assessing Officer did not accept the above computation and determined the book profit at Rs. 23,54,501. The Commissioner of Income-tax (Appeals) affirmed the same but in second appeal the Tribunal accepted the computation made by the assessee relying on the decision of the Tribunal in Surana Steels (P.) Ltd. v. Deputy CIT[1993] 201 ITR 1 (AT). (It must be noted here that the decision mentioned above was also the subject-matter of the decision of the Andhra Pradesh High Court in V. V. Trans-Investments (P.) Ltd.'s case [1994] 207 ITR 508, mentioned earlier). That court, after referring to the scheme of Section 115J, Clause (iii) thereof, and the provisions of Clause (b) of the first proviso to Section 205(1) of the Companies Act, 1956, observed that Clause (b) of the first proviso to Sub-section (1) of Section 205 of the Companies Act has been bodily lifted and incorporated in the Income-tax Act for working out the profit and loss for the company to work out the book profit and that the idea is that in any previous year if the book profit is to be worked out, then the deductions of the loss or depreciation have to be given but it is qualified that both cannot be made simultaneously either of them whichever is less. The court further observed as follows (page 292) :
"Therefore, in a case where the income is less than thirty per cent, of the book profit then in order to get the benefit of Section 115J, the company has to prepare the account of profit and loss in terms of Clause (b) of the first proviso to Sub-section (1) of Section 205 of the Companies Act, and on that basis, the assessee will be entitled to deduct depreciation or a loss whichever is less only when in a given year, there is a loss as well as depreciation. The assessee will not be entitled to both the benefits simultaneously. We need not dilate on this issue how the loss or depreciation is to be worked out. Suffice it to say that the provisions of the Income-tax Act will come into play for such exercise and it has to be worked out in terms of the Act. So far as the depreciation is concerned under Sub-section (1) of Section 32 of the Income-tax Act, it can be permitted in the previous year till it is exhausted, but the same is not applicable in the case of loss but it has to be worked out in terms of Sections 70, 71 and 72 of the Income-tax Act."
36. The court in that case set aside the order of the Tribunal, for, it did not consider even the question as to whether there was any depreciation or loss at all during the years 1986-87 and 1987-88. It would appear from the above quoted observations that the Madhya Pradesh High Court also has taken the same view as that of the Andhra Pradesh High Court.
37. The question as to whether the expression "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" came up for consideration before the same court in Krishna Oil Extraction Ltd. v. CIT [1998] 230 ITR 806. The assessee in that case was 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 the 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. The Appellate Tribunal in appeal, relying on the decision of the Andhra Pradesh High Court in V. V. Trans-Investments (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. That is how the question mentioned above has arisen before the High Court. Referring to the provisions of Explanation (iv) to Section 115J(1A) and the provisions of Section 205(1), Clause (b) of the first proviso of the Companies Act, the court observed as follows (page 809) :
"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, 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 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 loss, 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-Invest-ments (P.) Ltd. v. CIT [1994] 207 ITR 508. In that case, it was held that sec- tion 205(1)(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(1)(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(1)(b) of the Companies Act and not under the Income-tax Act."
38. Though it would appear from the aforesaid observations of the Madhya Pradesh High Court that they have dissented from the view taken by the Andhra Pradesh High Court in V. V. Trans-Investments (P.) Ltd.'s case [1994] 207 ITR 508, mentioned above to the effect that once the provisions of Section 205(1), first proviso, Clause (b) has been fictionally incorporated in the Income-tax Act the profit and loss have to be worked out in terms of the Income-tax Act and not under the Companies Act, they have taken the view that the loss and depreciation have to be worked out in terms of the Companies Act. From the conclusion reached by the court it would appear that the question was answered in the affirmative, viz., 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. We have already taken the view that the expression "loss" as it appears in Section 205(1), first proviso, Clause (b), of the Companies Act read with Clause (iii) of the Explanation to Section 115J of the Income-tax Act, will not take in depreciation. The conclusion reached by the High Court of Andhra Pradesh and by the Madhya Pradesh High Court in the aforesaid two cases, accords with the view taken by us.
39. We would in this context also note that Section 115J of the Act, by a fiction, fixes 30 per cent, of the "book profit" of an assessee which is a company as its total income chargeable to tax for the relevant previous year. This, as the Section itself says, is notwithstanding anything contained in any other provisions of this Act regarding computation of its total income. This notional fixation of total income for the purposes of Section 115J does not affect the right of the company to carry forward the unabsorbed depreciation, development rebate and loss which it is entitled to under the provisions of Sections 32(2), 32A(3) or under Clause (ii) of Sub-section (1) of Section 72, etc., as is evident from Sub-section (2) of Section 115J itself. This is also indicative of the fact that the legislative intention is not to grant all the reliefs which the assessee-company would have been entitled to in the computation of its total income under the provisions of the Act, while computing the income under Section 115J of the Act. That apart, it is relevant to note that the provisions of Section 115J was in force only in respect of the previous years relevant to the assessment years commencing on or after the first day of April, 1988, but before the first day of April, 1991. Thereafter, the said provision, though it remained in the statute book, was not in force for the subsequent assessment years. Later, the Legislature has inserted a new provision, Section 115JA by Section 39 of the Finance (No. 2) Act, 1996 (33 of 1996), with effect from April 1, 1997. In the memorandum explaining the provisions in the Finance (No. 2) Bill, 1996, it is stated as follows (see [1996] 220 ITR (St.) 263) :
"In the recent times, the number of zero tax companies and companies paying marginal tax has grown. Studies have shown that in spite of the fact that companies have earned substantial book profits and have paid handsome dividends, no tax has been paid by them to the exchequer.
The new Section 115JA provides for those companies to pay tax on 30 per cent. of the book profits, whose total income as computed under the Income-tax Act is less than 30 per cent. of the book profits as per the books of account prepared in accordance with Parts II and III of Schedule VI to the Companies Act, 1956. 'Book profit' is defined and certain adjustments are provided in the newly inserted section.
This amendment will take effect from April 1, 1997, and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years."
40. We refer to the new provision only to show that the said provision is, by and large, similar to the provisions of Section 115J itself. The only difference is that the said section has been restructured and certain minor changes are also made. As per Sub-section (2) of Section 115JA, every asses-see, being a company, shall, for the purposes of Section 115JA, 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. It provides that while preparing profit and loss account, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the profit and loss account laid before the company at its annual general body meeting in accordance with the provisions of Section 210 of the Companies Act, 1956. It also provides that where a company has adopted or adopts the financial year under the Companies Act, 1956, which is different from the previous year under the Act, the method and rates for calculation of depreciation shall correspond to the method and rates which have been adopted for calculating the depreciation for such financial year or part of such financial year falling within the relevant previous year. The Explanation to Sub-section (2) provides that for the purposes of this section, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under Sub-section (2) with the adjustments provided in Clauses (a) to (f) and (i) to (vii). Clause (in) of the Explanation refers ,to the amount of loss brought forward or unab-sorbed depreciation, whichever is less as per books of account. The Explanation thereto says that for the purposes of this clause, the loss shall not include depreciation. Though the provisions of Section 115JA are applicable only for the assessment year 1997-98 onwards, it would appear that the restructuring of the section was necessitated only because of the dispute in regard to the determination of "book profit" pending before the courts and the Tribunals. According to us, the effect in Clause (iii) together with the Explanation thereto in the Explanation to Sub-section (2) of the new Section 115JA, is to clarify the legislative intention behind Clause (iii) of the Explanation to Sub-section (1) of Section 115J of the Act. This also supports the view taken by us to the effect that the expression "the loss" used in Section 115J means "excluding depreciation". We are of the view that the findings rendered by the Tribunal and detailed in paragraph 6 above in so far as they are inconsistent with what we have stated above, cannot be sustained.
41. It is seen that the Commissioner of Income-tax (Appeals) in the appellate order (annexure-B) discussed the question regarding the adjustments to be made in the net profit as provided in Clause s (a) to (f) and Clause s (i) to (iii) of the Explanation to Section 115] of the Act and observed as follows :
"It can be seen from the above that the amount of Rs. 14,36,34,034 was arrived at by the Assessing Officer without considering the provisions . of Clause (iii) of the Explanation to Section 115J. As I have discussed in the preceding paragraph, it is necessary to give set off for business loss or depreciation whichever is less, in accordance with Section 205(1)(b) of the Companies Act for determining the book profit. This has to be ascertained from the profit and loss account of the company from the very beginning as the company was incorporated only after the introduction of the Companies (Amendment) Act. After ascertaining the business loss and depreciation separately, the Assessing Officer should give deduction on lesser of the two amounts and arrive at the profit for determining the total income chargeable to tax as contemplated in Section 115J. Therefore, this part of the order requires to be set aside at this stage. The Assessing Officer will determine the tax accordingly."
42. This portion of the order has not been challenged by the Revenue before the Tribunal and, therefore, it has become final. This is a matter for the Assessing Officer to consider when he gives effect to the consequential order of the Tribunal, if it has not already been done earlier.
43. The next question is regarding the claim made by the assessee under Section 32AB of the Act. Questions Nos. 2 and 3 referred by the Tribunal for our opinion in I. T. R. No. 70 of 1994 relate to the said claim. Question No. 2 referred to in I. T. E. No. 43 of 1997 is in a way connected with the said question. The Tribunal itself in para. 4 of the supplementary statement of case (I. T. R. No. 43 of 1997) has stated it to be so. Accordingly, we will consider the said two questions together. The assessee-company during the previous year had purchased certain new machinery/plant from out of its income chargeable under the head "Profits and gains of business or profession". In terms of Sub-clause (ii) of Clause (b) of Sub-section (1) of Section 32AB, the assessee would be entitled to a deduction of twenty per cent. of the profits of eligible business. Sub-section (2)(i) of Section 32AB defines "eligible business". The assessee, inter alia, had included a sum of Rs. 1,51,89,760 representing the dividend on units of the Unit Trust of India in the computation of the profits of eligible business. The assessing authority excluded the said amount from the profits of eligible business on the ground that it is not income from eligible business. The Commissioner of Income-tax (Appeals) confirmed the same. On appeal, the Appellate Tribunal allowed the claim of the assessee. The reasons for allowing the said claim are contained in para. 44 of the appellate order of the Tribunal. The relevant portion is extracted below :
"From the language of Section 32AB and the circular thereunder it is clear that investment deposit or the purchase of a new asset or plant must have come out of the income chargeable to profits and gains of business or profession. Since the income from units of the Unit Trust of India is chargeable under the head 'Other sources', the same cannot be construed as forming part of the income chargeable to tax under the head 'Profits and gains of business or profession'. This is as far as the amount deposited in the investment deposit account or the amount invested in the purchase of new machinery or new plant is concerned. In other words, the source of the amount for deposit or for the purchase of the new machinery should come from income chargeable to tax under the head 'Profits and gains of business'. But the definition of 'eligible business or profession' is in a sense wide. Except those business specified in Clause s (a) and (b) of subsection (2) of Section 32AB, all other business or profession have to be construed as 'eligible business'. In other words, an eligible business need not necessarily be an industrial undertaking engaged in the manufacture or production of an article. One of the components to be considered for deduction under Sub-section (1)(ii) of Section 32AB is the profit of eligible business to the extent of 20 per cent, of the same. That profit has to be computed in the manner laid down in Sub-section (3) of Section 32AB cited supra. We, therefore, conclude that whatever income is earned by the assessee either from its activity of manufacture or production for sale or from other activities such as dealing in shares and earning profits thereon and receiving income on such shares in the interim period as long as they constituted the same business--all will fall under the category of 'eligible business'. The reason is by definition, eligible business, is not confined to manufacture or production. Moreover inter head and intra head adjustments are the cardinal features of computation of income. Further; in the case of the assessee, the accounts have been prepared in accordance with Part II and Part III of the Sixth Schedule to the Companies Act, 1956, as is the mandate in Sub-section (3) of Section 32AB. From the published profit and loss account prepared in accordance with Part II and Part III of the Sixth Schedule to the Companies Act, it is seen that the income from units of the Unit Trust of India and profit or loss on the sale of units were considered before ascertainment of the net profit of the undertaking. From such profit, the adjustments envisaged in Sub-section (3) of Section 32AB are to be given effect to. Moreover, these two activities of the assessee have to be construed as forming part of the same business as there is one account for all the funds, which are intertwined and interlaced with each other, and the business is conducted under a common management. There is one profit and loss account and one balance-sheet. It is the perception of the activities from the point of view of a businessman that is material. It is such perception that is recognised in Part II and Part III of the Sixth Schedule to the Companies Act, wherein miscellaneous incomes and other incomes are designed to enter the profit stream. In. Section 32AB(3) or Section 32AB(l)(ii) the expression 'chargeable to profits and gains of business' is conspicuous by its absence. Hence, the dichotomy as between the income from manufacture and income from units of the Unit Trust of India is not warranted in terms of Section 32AB(3) of the Income-tax Act, or on the ratio laid down by the Supreme Court in Setabganj Sugar Mills Ltd. v. CIT [1961] 41 ITR 272 (SC); CIT v. Prithvi Insurance Co. Ltd. [1967] 63 ITR 632 (SC) and Produce Exchange Corporation Ltd. v. CIT [1970] 77 ITR 739 (SC). We hold accordingly. The authorities erred in holding otherwise. As both the activities constituted same business, which is an eligible business, the provisions of Section 32AB(3)(b) are not applicable."
44. On the said finding, the Tribunal issued the following directions to the assessing authority ;
"The Income-tax Officer is, therefore, directed to first limit the amount of deposit or the amount utilised in the purchase of new machinery or new plant to the income chargeable under the head 'Profits and gains of business', under Section 32AB(1). Then for the purpose of working out the deduction, rather more specifically, in computing 20 per cent. of the eligible profit, the income from units of the Unit Trust of India (dividends and profit or loss on the sale of units) should also be considered along with other income as found in the profit and loss account prepared in accordance with Part II and Part III of the Sixth Schedule to the Companies Act, subject to such adjustments as have been prescribed therein."
45. It is against these findings of the Tribunal that the three questions mentioned above are referred at the instance of the Revenue.
46. Learned counsel appearing for the Revenue submitted that what the assessee received from the Unit Trust of India was dividend, that dividends are assessable under "Other sources", that the heads of income prescribed in Section 14 of the Act are mutually exclusive and that once a particular receipt falls under a particular head of income it cannot be held that it was part of income from another head. Counsel submitted that in the instant case, the dividend income received by the assessee from the Unit Trust of India was returned under the head "Other sources" and that it was assessed also under "Other sources". On that basis it is contended that the said income cannot be treated as income from an eligible business within the meaning of Section 32AB(2) of the Act. It is further contended that since dividend income does not fall under the head "Income from business or profession", the assessing authority and the first appellate authority were justified in excluding the said income.
47. Sri Sarangan, learned counsel appearing for the assessee, on the other hand, submitted that the assessing authority himself had considered the dealing of the assessee in the purchase and sale of units as business and in fact, had allowed the loss incurred in the said business to be set off against the profits of the business. Counsel further submitted that the Department has no case that the dealing in the purchase and sale of units by the assessee, is not in the course of its business or that the said activity is not the business. It is further contended that the only case of the Department is that since the dividend income received by the assessee from the Unit Trust of India is assessed under "Other sources", the said income cannot be, considered as income from eligible business for the purpose of Section 32AB of the Act. It is stated that the assessee is having only one account for both the manufacture and sale of tyres and the purchase and sale of units and that the income from the Unit Trust of India was recognised as an income in the profit and loss account and the business profit was thus ascertained. It is its further case that as far as the assessee is concerned the units are held as stock-in-trade as it is frequently buying and selling the same and there is one common account of funds and management and therefore, the activities of manufacture and sale of tyres and dealing in the units of the Unit Trust of India cannot be segregated and must be treated as part of the same business.
48. We have considered the matter. Section 32AB inserted by the Finance Act, 1986, with effect from April 1, 1987, Sub-sections (1), (2) and (3) thereof, relevant for the purpose of this case, read as follows :
"32AB". Investment deposit account.--(1) Subject to the other provisions of this section, where an assessee, whose total income includes income chargeable to tax under the head 'Profits and gains of business or profession', has, out of such income,--
(a) deposited any amount in an account (hereafter in this section referred to as deposit account) maintained by him with the Development Bank before the expiry of six months from the end of the previous year or before furnishing the return of his income, whichever is earlier ; or
(b) utilised any amount during the previous year for the purchase of any new ship, new aircraft, new machinery or plant, without depositing any amount in the deposit account under Clause (a), in accordance with, and for the purposes specified in, a scheme (hereafter in this section referred to as the scheme) to be framed by the Central Government, or if the assessee is carrying on the business of growing and manufacturing tea in India, to be approved in this behalf of the tea board, the assessee shall be allowed a deduction (such deduction being allowed before the loss, if any, brought forward from earlier years is set off under Section 72) of-
(i) a sum equal to the amount, or the aggregate of the amounts, so deposited and any amount so utilised ; or
(ii) a sum equal to twenty per cent. of the profits of eligible business or profession as computed in the accounts of the assessee audited in accordance with Sub-section (5), whichever is less :
Provided that where such assessee is a firm, or any association of persons or any body of individuals, the deduction under this section shall not be allowed in the computation of the income of any partner, or, as the case may be, any member, of such firm, association of persons or body of individuals. . . .
(2) For the purposes of this section,--
(i) 'eligible business or profession' shall mean business or profession, other than-
(a) the business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule carried on by an industrial undertaking, which is not a small-scale industrial undertak- -ing as defined in Section 80HHA ;
(b) the business of leasing or hiring of machinery or plant to an industrial undertaking, other than a small-scale industrial undertaking as defined in Section 80HHA, engaged in the business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule ;
(ii) 'new ship' or 'new aircraft' includes a ship or aircraft which before the date of acquisition by the assessee was used by any other person, if it was not at any time previous to the date of such acquisition owned by any person resident in India ;
(iii) 'new machinery or plant' includes machinery or plant which before the installation by the assessee was used outside India by any other person, if the following conditions are fulfilled, namely :--
(a) such machinery or plant was not, at any time previous to the date of such installation by the assessee, used in India ;
(b) such machinery or plant is imported into India from any country outside India ; and
(c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee ;
(iv) 'Tea Board' means the Tea Board established under Section 4 of the Tea Act, 1953 (29 of 1955) ;
(3) The profits of eligible business or profession of an assessee for the purposes of Sub-section (1) shall,--
(a) in a case where separate accounts in respect of such eligible business or profession are maintained, be an amount arrived at after deducting an amount equal to the depreciation computed in accordance with the provisions of Sub-section (1) of Section 32 from the amounts of profits computed in accordance with the requirements of Parts II and III of the Sixth Schedule to the Companies Act, 1956 (1 of 1956), as increased by the aggregate of--
(i) the amount of depreciation ;
(ii) the amount of income-tax paid or payable, and provision therefor ;
(iii) the amount of surtax paid or payable under the Companies (Profits) Surtax Act, 1964 (7 of 1964) ;
(iv) the amounts carried to any reserves, by whatever name called ;
(v) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities ;
(vi) the amount by way of provision for losses of subsidiary companies ; and
(vii) the amount or amounts of dividends paid or proposed, if any debited to the profit and loss account ; and as reduced by any amount or amounts withdrawn from reserves or provisions, if such amounts are credited to the profit and loss account ; and
(b) in a case where such separate accounts are not maintained or are not available, be such amount which bears to the total profits of the business or profession of the assessee after allowing depreciation in accordance with the provisions of Sub-section (1) of Section 32, the same proportion as the total sales, turnover or gross receipts of the eligible business or profession bear to the total sales, turnover or gross receipts of the business or profession carried on by the assessee."
49. In this context, it will be useful to refer to Circular No. 461, dated July 9, 1986 ([1986] 161 ITR (St.) 17), issued by the Central Board of Direct Taxes, New Delhi, by way of Explanatory Notes on the provisions relating to direct taxes contained in the Finance Bill, 1986. Paragraph 17 thereof relates to Section 32AB, Under paragraph 17.3 it is stated as follows (page 25):
"The new scheme is applicable to all existing types of assessees as also to the professionals and the leasing companies which have not leased out machinery to those industrial undertakings other than a small scale industrial undertaking, engaged in the manufacture or production of articles or things listed in the Eleventh Schedule to the Income-tax Act. In other words, the deduction is admissible to all the assessees who carry on 'eligible business or profession', which as per Section 32AB(2) means business or profession other than the business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule (in case it is not a small scale industrial undertaking) and the business of leasing or hiring of machinery or plant to an industrial undertaking other than a small scale industrial undertaking engaged in the business of low priority items as specified in the list in the Eleventh Schedule. It may be clarified that the business of construction is an eligible business for the purposes of this provision."
50. Paragraph 17.4 of the said circular which deals with other salient features of the scheme of the investment deposit account, states as follows (page 26) :
"(a) Under Section 32AB(1), it has been provided that deposits with the development bank or the purchase of a new ship, new aircraft, new machinery or plant should be out of income chargeable to tax under the head 'Profits and gains of business or profession'. However, for arriving at the book profit, a uniform system of accounting is yet to be enforced even in the organised sector. Hence, the term 'profit of eligible business or profession' has been defined as per Section 32AB(3) in order to ensure uniformity in determining the profits qualifying for deduction, as also to reduce uncertainty about the interpretation of this term. In terms of Section 32AB(3)(a), it has been provided that the profits of eligible business or profession for the purposes of deduction under these provisions will mean, in a case where separate accounts in respect of such business or profession are maintained, an amount arrived at after deducting an amount equal to the depreciation computed in accordance with the provision of Section 32(1) of the Income-tax Act from the amount of profits computed in accordance with the requirements of Parts II and III of the Sixth Schedule to the Companies Act, 1956, as increased by an amount equal to the depreciation, if any, debited in the audited profit and loss account. This implies that the profit has to be computed, taking into account only the depreciation for the current year, as admissible under the Income-tax Act. Further, Part II of the Sixth Schedule to the Companies Act lays down the requirements as to profit and loss account. These requirements, as per the provisions of Section 32AB(3) of the Income-tax Act, will be applicable in the cases of corporate as well as non-corporate assessees."
51. As per Section 32AB of the Act, where an assessee, whose total income includes income chargeable to tax under the head "Profits and gains of business or profession", has, out of such income, utilised any amount during the previous year for the purchase of new machinery or plant, the assessee shall be allowed a deduction of a sum equal to twenty per cent. of the profits of "eligible business" as computed in the accounts of the assessee audited in accordance with Sub-section (5). "Eligible business", for the purposes of this Section, is defined under Sub-section (2)(i) to mean business other than (a) the business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule carried on by an industrial undertaking which is not a small-scale industrial undertaking as defined in Section 80HHA, and (b) the business of leasing or hiring of machinery or plant to an industrial undertaking other than a small-scale industrial undertaking as defined in Section 80HHA, engaged in the business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule. The computation of profits of eligible business for the purpose of Sub-section (1) is provided in Sub-section (3). From a reading of the provisions of Section 32AB and the circular mentioned above it would be clear that the benefit of the said Section will be available to all business income from whatever sources other than those mentioned in Sub-clauses (a) and (b) of Clause (i) of Sub-section (2) of the said Section. It is relevant to note that Sub-section (1) of Section 32AB consists of two parts. One is regarding utilisation of the income from the business. The other is regarding the deduction available on the utilisation of such income. Regarding the utilisation of the income, in order to qualify for deduction under the said Sub-section, the utilisation must be from out of the income chargeable to tax under the head "Profits and gains of business or profession". It also provides that the utilisation of such income must be for the purchase of new machinery/plant during the previous year. The said Sub-section itself contemplates that the total income of an assessee may consist of other income also. When it comes to the deduction part, such a distinction is not seen made. The deduction available under the said Sub-section is an amount equal to twenty per cent. of the profits of the eligible business. So, what is required for fixing the quantum of deduction is to find out the profits of eligible business from out of the total income. As already stated, by virtue of the definition contained in Clause (i) of Sub-section (2) of Section 32AB, "eligible business" means business other than those provided in Sub-clauses (a) and (b) thereof. Admittedly the activity of purchase and sale of units of the Unit Trust of India does not fall under the said two Sub-clauses. Therefore, it has to be held that the business of buying and selling of units of the Unit Trust of India is an eligible business and the profits thereof qualify for inclusion for determining the quantum of deduction available under the said Sub-section. In this context, it is relevant to note that the Department has no case that the activity of the assessee-company by way of purchase and sale of units of the Unit Trust of India is not a business activity or that the income by way of dividend or profits on the sale of units is not business income. In fact, the Tribunal has noted in paragraph 39 of the appellate order that "there is no dispute that the business of the assessee falls within the meaning of eligible business. The dispute is only about the computation of profits of such business." In other words, the case of the Department is that since dividend income has been returned by the asses-see as income from other sources and since the said income was assessed under other sources, the said income cannot be treated as business income qualifying for inclusion in the profits of eligible business. This contention is raised by the Department on the assumption that once the dividend income is excluded from the income chargeable to tax under the head "Income from business", the same can never be treated as business income. This assumption is unfounded. Section 28 of the Act specifies different kinds of income chargeable to tax under the head "Profits and gains of business or profession". Clause (i) of the said Section provides that the profits and gains of any business or profession which is carried on by the assessee at any time during the previous year are chargeable to tax under the above head. But Section 56 of the Act falling under the head "income from other sources", Clause (i) of Sub-section (2) thereof specifically provides that "dividends" shall be chargeable to income-tax under the head "Income from other sources". It has to be noted that income chargeable to tax under the head "Income from other sources" is only that income which is not chargeable to income-tax under any of the heads specified in Section 14, items A to E. In other words, if a particular item of income can be included under any of the other heads mentioned in Section 14 of the Act, the same is not liable to be assessed under the head "Income from other sources". It is so stated in Sub-section (1} of Section 56 of the Act. Incomes falling under the various Clauses in Sub-section (2) of Section 56 are the exceptions to the above. It is by virtue of the specific provisions contained in Sub-section (2) of Section 56 that the assessee had excluded dividend income from the income chargeable to tax under the head "Income from business" and the dividend income was assessed under the head "Income from other sources". This does not mean that in the case of an assessee who is engaged in the business of buying and selling of units of the Unit Trust of India the dividend income received ceases to have the character of business income. On the other hand, the same will also form part of the business income. The only thing is that because of the specific provisions contained in Sub-section (2) of Section 56 of the Act the said income, namely, dividend income, cannot be included in the income chargeable to tax under the head "Income from business", nor can it be assessed as such. As already stated, the relevance of income chargeable to tax under the head "Income from business" comes in only in the context of the utilisation of the income out of the total income of the previous year for the purchase of new machinery/plant. It has no relevance when it comes to the deduction part. There, the only relevance is to "profits of eligible business". The expression "eligible business" is also defined. If the legislative intention, as contended by the Department, is to allow deduction of a sum equal to twenty per cent. of the income chargeable to tax under the head "Income from business", the Legislature could have specifically said so, in which case it was not at all necessary to use the expressions "profits of eligible business" or to give a definition of "eligible business". As already stated by the Tribunal, the expression "chargeable to profits and gains of business" is conspicuous by its absence in Section 32AB(1)(ii) or in Section 32AB(5). The Department has taken a contention based on the provisions of Sub-section (3) of Section 32AB that dividend income cannot form part of the profits of eligible business. The Commissioner of Income-tax (Appeals) has also taken the stand that dividend income will not fall in the items of Clause (a) of Section 32AB(3). Section 32AB(3) deals with the profits of eligible business. In other words, it provides the mode for arriving at the "profits of eligible business". It is only for the said purpose Clauses (a) and (b) of the said Sub-section provide different modes for arriving at the profits of eligible business. Clause (a) provides the mode for calculation of the profits of eligible business in a case where separate accounts in respect of such eligible business are maintained and Clause (b) provides the mode for calculation of the profits of eligible business in a case where such separate accounts are not maintained or are not available. It has to be noted that while Clause (i) of Sub-section (2) of Section 32AB defines "eligible business", Sub-section (3) of Section 32AB provides the mode for computation of profits of eligible business for the purposes of Clause (iii) of Sub-section (i) of Section 32AB. Sub-section (3) of Section 32AB is attracted only in a case where the assessee's total income consists of income from eligible business as well as non-eligible business. It is only in such a case separation of profits of eligible business from the total profits of the business as contemplated under Clause (b) of Sub-section (3) arises. In the instant case, we have already held that the activity of buying and selling of the units of the Unit Trust of India will form part of the eligible business of the assessee and its income by way of dividend and profits arising from the sale of units all will form part of the profits of eligible business. In the instant case, the Tribunal has categorically found that the assessee had maintained only one account for all the funds and that there is one profit and loss account and one balance-sheet both in respect of the manufacture and sale of tyres and in respect of purchase and sale of units of the Unit Trust of India. We have extracted earlier in this judgment the reasoning of the Tribunal for allowing the claim for inclusion of the income from dividends in the profits of eligible business for the purpose of Clause (ii) of Sub-section (1) of Section 32AB. We find that the above reasoning accords with the view taken by us above. We are in full agreement with the reasoning and conclusion of the Tribunal in that regard.
52. Since the Revenue has raised a specific question as to whether the Tribunal was justified in holding that the assessee's business in the purchase and sale of units and its business in the manufacture and sale of tyres constituted one and the same business and since the Tribunal has referred the question for opinion as directed by this court in 0. P. No. 2487 of 1994, we will deal with the same also.
53. Before going into the said question it is necessary to see how it was considered by the Assessing Officer and by the appellate authorities. The Assessing Officer in the computation of total income under the Act for the year in question treated the entire business of the assessee as one and excluded only the income of Rs. 1,51,89,760 received from the Unit Trust of India. In other words, loss suffered on account of the sale of units, Rs. 22,69,700 and claimed as deduction in the computation of total income was not disallowed. This itself shows that the Assessing Officer had treated the dealing in purchase and sale of units of the Unit Trust of India as "business" and that too as part of the same business. The Commissioner of Income-tax (Appeals) also did not have a case that the said activity of the assessee is not business. The only case of the said authority is that in view of the Explanation to Section 73 of the Act, the said activity is a speculation business falling under the head "Income from business" and, consequently, the loss arising out of the said business should be considered as speculation loss and that though this is a loss falling under "business loss" the set off of the said loss has to be allowed only in the year in which the company derived profit from speculation business. He has no case that if the assumption that the said activity is speculation business goes, still the same must be treated as a separate business.
54. The Appellate Tribunal, while considering the claim under Section 32AB, observed as follows :
"Moreover, these two activities of the assessee have to be construed as forming part of the same business as there is one account for all the funds, which are intertwined and interlaced with each other, and the business is conducted under a common management."
55. The Tribunal in paragraph 54 of its appellate order again observed that the assessee's business in the purchase and sale of units and its business in the manufacture and sale of tyres constituted one and the same business. The reason for holding so stated by the Tribunal has already been extracted and hence is not discussed here.
56. The question as to whether the said two activities constitute one and the same business is relevant in the context of profits of eligible business and set off of losses or depreciation. As already stated, if the assumption that the activity of purchase and sale of units is "speculation business" mentioned in Explanation 2 to Section 28 and in the Explanation to Section 73 goes, the fact that they are separate business falling under the head "Profits and gains of business or profession" mentioned in Section 28 of the Act is of no consequence since the income therefrom has to be computed in accordance with the provisions contained in Sections 30 to 43C as specified in Section 29 of the Act. Even if the said two activities of the assessee are treated as two separate businesses, once they fall under the definition of "eligible business", deduction will be available in respect of the profits of both the activities. Likewise, by virtue of the provisions of Section 70, the loss from one source can be set off against the loss from another source since they fall under the same head of income.
57. The test for determining whether two lines of business constitute the same business came up for consideration before the Supreme Court in the context of Section 24(2) of the Indian Income-tax Act, 1922, as it stood prior to its amendment in 1955, in CIT v. Prithvi Insurance Co. Ltd. [1967] 63 ITR 632 (SC) and the Supreme Court at page 637 of the said decision observed thus :
"A fairly adequate test for determining whether the two constitute the same business is furnished by what Rowlatt J. said in Scales v. George Thompson and Co. Ltd. [1927] 13 TC 83, 89 :
'Was there any interconnection, any interlacing, any interdependence, any unity at all embracing those two businesses ?' That interconnection, interlacing, interdependence and unity are furnished in this case by the existence of common management, common business organisation, common administration, common fund and a common place of business."
58. The Supreme Court again considered the same issue in Produce Exchange Corporation Ltd. v. CIT [1970] 77 ITR 739 (SC). There, the question was as to whether the share business and other business carried on by the appellant-company constituted the same business. Applying the test mentioned above, the Supreme Court held that there is no doubt that there is a common management of the share and stock business and other lines of business, unity of trading organisation, common employees, common administration, a common fund and a common place of business. The Supreme Court accordingly held that the Tribunal was right in holding that the share business and the other businesses carried on by the appellant-company constituted the same business within the meaning of Section 24(2) as that Section stood before it was amended in 1955. The dicta laid down by the Supreme Court in the above two cases were followed by the Supreme Court again in Standard Refinery and Distillery Ltd. v. CIT [1971] 79 ITR 589 and also in B.R. Ltd. v. V.P. Gupta, CIT [1978] 113 ITR 647. The Tribunal, in the instant case, found as a fact that all the tests laid down by the Supreme Court in the abovementioned decisions are satisfied. We find that the aforesaid finding of the Tribunal that the assessee's business in the purchase and sale of units and its business in the manufacture and sale of tyres constituted one and the same business, is perfectly in tune with the tests laid down by the Supreme Court in that regard.
59. The next question for consideration is as to whether the Tribunal was justified in holding that the buying and selling of units is not a speculation business, that the loss of Rs. 22,69,700 was allowable as a business loss and that it cannot be treated as a speculation business loss. The assessing authority, in the assessment under consideration, had allowed the loss of Rs. 22,69,700 incurred by the assessee on account of the sale of units as business loss to be adjusted against the profits. The Commissioner of Income-tax (Appeals) invoked the power of enhancement and issued notice proposing to disallow the same. According to the Commissioner of Income-tax (Appeals), the loss on sale of units amounting to Rs. 22,69,700 has to be treated as speculation loss in view of the Explanation to Section . 73 of the Income-tax Act, 1961. The assessee contended that though the unit trust is deemed as a company under the Unit Trust of India Act, 1965, and the income from units as dividend, the units are not shares as per the said Act, that the Unit Trust of India is not a company falling within the purview of the Companies Act and that the unit holder is not a shareholder. It was also contended that the Explanation to Section 73 is only concerned with companies carrying on business in the purchase and sale of shares of other companies and that in the absence of a definition of "shares" in the Income-tax Act, the definition of "share" in Section 2(46} of the Companies Act applied which means share in the share capital of a company and includes stock except where a distinction between stock and shares is expressed or implied, which is absent in the case of units of the Unit Trust of India. The Commissioner of Income-tax (Appeals) rejected the said contentions stating that the Explanation to Section 73 is only a deeming provision and that the Explanation contemplates treatment of certain companies as companies carrying on speculation business to the extent to which the business consists of the purchase and sale of shares and that this has nothing to do with "speculative transactions" defined in Section 43(5). Referring to the provisions of Section 32 of the Unit Trust of India Act, the Commissioner of Income-tax (Appeals) observed that though it is not specifically mentioned in the said Section that units will be treated as shares, it is implied that the units will also be like shares. He also observed that if the Unit Trust is deemed as a company and the distribution of income is to be considered as dividend for income-tax purpose, there is no reason why units cannot be treated as shares for the purpose of the Income-tax Act. The Commissioner of Income-tax (Appeals) also relied on the appellate order passed by him for the year 1986-87 wherein he has held with reference to the Explanation to Section 73 that the income from sale of units is income arising out of speculation business falling under the head "Income from business". On that basis, the Commissioner of Income-tax (Appeals) held that the loss arising out of the sale of units is a speculation loss and though it is a loss falling under "business loss", the said loss can be set off only against profit from speculation business. In that view, the Commissioner of Income-tax (Appeals) held that the sum of Rs. 22,69,700 has to be considered as speculation loss to be carried forward and directed the assessing authority to treat this loss separately and allow carry forward accordingly. The Income-tax Appellate Tribunal considered the question in the light of the provisions of the Unit Trust of India Act, 1963, as amended in 1985 and observed that the purpose of the Act is to provide for the establishment of a corporation with a view to encouraging savings and investments and participation in the incomes, profits and gains accruing to the corporation from the acquisition, holding, management and disposal of securities. Referring further to the definition Clauses and other provisions of the said Act, the Tribunal observed as follows :
"From these definitions it is clear that a unit holder is not a shareholder of the Unit Trust of India. Only the institutions specified in Section 4 can be said to be the contributing institutions. A unitholder is just an investor. He has no right in the management of the trust. The dividends that are declared by the Unit Trust of India are not at the instance or approval of the unitholder. The unitholder has no say in the affairs of the trust. Therefore, the unitholder cannot be treated as a shareholder and the units cannot be treated as shares. Hence, the Explanation to Section 73 of the Income-tax Act which concerns with the buying and selling of shares cannot be invoked."
60. Referring further to the submissions made by counsel appearing for the Revenue with reference to Sub-section (3) of Section 32 of the said Act, the Tribunal observed that it is in relation to the provisions of Sections 193 and 194 of the Income-tax Act, 1961, mentioned in Section 32(2) of the Unit Trust of India Act the provisions of Sub-section (3) declares that the income distributed by the Unit Trust should be considered as dividend and it should be treated as a company. It is further observed that the fiction created in Section 32(3) of the Unit Trust of India Act is limited to the provisions of Section 32(1) and (2) and cannot be extended beyond. The Tribunal further held as follows :
"A share is a bundle of rights and a shareholder is one who can exercise those rights on his own. One of the rights attaching to shareholders is to participate in the affairs of the company. The right to elect the board of directors and the right to approve the accounts and to vote for the dividend are some of the other rights. No such rights are available to the unit-holder, such rights having been perhaps reserved for the initial contributions, such as the Reserve Bank of India, Life Insurance Corporation of India etc. The Explanation to Section 73 of the Income-tax Act, 1961, arises only when there is transaction in the purchase and sale of shares. Units not being shares, and further as each purchase and each sale was accompanied by physical delivery of units, it cannot be said that the assessee was indulging in speculative transactions when it dealt with the purchase and sale of shares."
61. The Revenue canvasses the correctness of the findings of the Tribunal. For deciding the said question, it is necessary to refer to the relevant provisions of the Income-tax Act, 1961, and also the provisions of the Unit Trust of India Act. Income from "business or profession" is liable to be computed under the provisions of Sections 28 to 41 of the Act. Section 28 enumerates different types or categories of income chargeable to tax under the head "Profits and gains of business or profession" and Clause (i) deals with the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year. In this context, Explanation 2 to the said Section provides that where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as "speculation business"), shall be deemed to be distinct and separate from any other business. Section 43 gives definitions of certain terms relevant to income from profits and gains of business or profession. Sub-section (5) of the said Section defines "speculative transaction" as a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. The Explanation and the provisions of Section 43(5) have a relevance in the context of Section 73. Section 73 of the Act provides for losses in speculation business. Sub-section (1) of Section 73 provides that any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business. Sub-section (2) provides that where for any assessment year any loss computed in respect of a speculation business has not been wholly set off under Sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no income from any other speculation business, shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and it shall be set-off against the profits and gains, if any, of any speculation business carried on by him assessable for that assessment year. The Explanation to Section 73 reads as follows ;
"Where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads 'Interest on securities', 'Income from house property', 'Capital gains' and 'Income from other sources' or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this Section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares."
62. The assessing authority, as already stated, has allowed the loss in question to be adjusted against the income chargeable under the head "Business", but the Commissioner of Income-tax (Appeals) disallowed the same and directed the said loss to be carried forward for set off against the income from speculation business of the subsequent years on the ground that the Explanation to Section 73 applied. As per the Explanation, where any part of the business of a company (leaving the other portions) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this Section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. So, the question to be considered is as to whether in the instant case, the units issued by the Unit Trust of India are shares and further as to whether the Unit Trust of India is a company. In other words, if the units issued by the Unit Trust of India cannot be considered as shares, there is no scope for applicability of the provisions of the Explanation to Section 73. For the said purpose, it is necessary to refer to the provisions of the Unit Trust of India Act itself. The Appellate Tribunal has referred to and in fact extracted the relevant portions of the said Act. Section 2 of the said Act deals with the definitions. The definitions of "securities", "unit", "unit capital", "unit certificate", "unitholder" and "unit scheme" are as follows :
"(i) 'securities' means shares, debentures, bonds and other stock of any company or other body corporate, whether incorporated in India or outside, and securities issued by any local authority in India, or by the Government of, or a local authority, in any such country outside India as may be approved by the Reserve Bank and includes Government securities as defined in Section 2 of the Public Debt Act, 1944 (18 of 1944), but does not include mortgage on immovable property ; , . .
(n) 'unit' means a unit issued under a unit scheme ;
(o) 'unit capital' means the aggregate of the face value of the units sold under a unit scheme and outstanding for the time being ;
(p) 'unit certificate' means a certificate issued to the purchaser of a unit under a unit scheme ;
(q) 'unitholder' means a person for the time being recognised by the trust as the holder of a unit certificate under a unit scheme ;
(r) 'unit scheme' means a scheme made under Section 21."
63. Section 52 of the said Act reads as follows ;
"32. Income-tax and other taxes.--(1) Notwithstanding" anything contained in the Wealth-tax Act, 1957, the Income-tax Act, 1961, the Super Profits Tax Act, 1963, the Companies (Profits) Surtax Act, 1964, or in any other enactment for the time being in force relating to income-tax, super tax or super profits-tax, surtax or any other tax on income, profits or gains-
(a) the trust shall not be liable to any income-tax, super-tax, super profits tax, surtax or any other tax in respect of any income, profits or gains derived by it from any source ;
(aa) in the case of an assessee who is not resident in India, being,--
(i) an individual who is an Indian or a person of Indian origin, or
(ii) a Hindu undivided family, there shall not be included in the total income of such assessee, for the purposes of the Income-tax Act, 1961, any income received by such assessee in the previous year in respect of units acquired by such assessee from the trust out of funds in a Non-resident (External) Account maintained with any bank in India or by the remittance of funds in foreign exchange, in accordance, in either case, with the provisions of the Foreign Exchange Regulation Act, 1973, or any rules or orders made thereunder ; . . .
(bb) in the case of an assessee who is not resident in India, being an individual who is an Indian or a person of Indian origin, or a Hindu undivided family, wealth-tax shall not be payable by the assessee in respect of, and there shall not be included in, the net wealth of the assessee computed under the Wealth-tax Act, 1957, the value of the assets in the form of units acquired from the Trust, out of funds in a Non-resident (External) Account maintained with any bank in India or by the remittance of funds in foreign exchange, in accordance, in either case, with the provisions of the Foreign Exchange Regulation Act, 1973, or any rules or orders made thereunder ;
(c) where a contributing institution is liable to be assessed to super profits tax under the Super Profits-tax Act, 1963, or to surtax under the Companies (Profits) Surtax Act, 1964, in respect of its own income, profits or gains and receives any sum from the Trust under this Act in respect of its contribution to the initial capital, such sum as reduced by the amount of any income-tax and super-tax payable in respect thereof shall be excluded from the total income of the said institution in computing its chargeable profits for the purposes of super profits tax, or surtax.
Explanation 1.--In this Sub-section,--
(a) in Clause (aa), the expressions 'previous year' and 'total income' shall have the meanings, respectively, assigned to them in the Income-tax Act, 1961 ;
(b) in Clause (bb), the expressions 'assessee' and 'net wealth' shall have the meanings, respectively, assigned to them in the Wealth-tax Act, 1957, Explanation II.--For the purposes of Sub-sections (1) and (2),--
(a) an assessee shall be deemed to be 'not resident in India', if he is a non-resident within the meaning of Clause (30) of Section 2 of the Income-tax Act, 1961 ;
(b) a person shall be deemed to be a person of Indian origin if he or either of his parents or any of his grand parents howsoever high in degree of ascent, whether on the paternal side or on the maternal side, was born in India, as defined in the Government of India Act, 1935, as originally enacted :
(2) Notwithstanding anything contained in Section 193 or Section 194 of the Income-tax Act, 1961--
(a) no deduction of income-tax or super-tax shall be made on any interest or dividend payable to the Trust in respect of any securities or shares owned by it or in which it has full beneficial interest ;
(b) no deduction of income-tax shall be made by the Trust from the income distributed by it to a unitholder being an individual ; and
(c) where in the case of a unitholder, being an individual who is not resident in India, the income in respect of units receivable by him from the trust during the financial year--
(i) does not exceed seven thousand rupees, no deduction of income-tax shall be made by the Trust from the income distributed by him;
(ii) exceeds seven thousand rupees deduction of income-tax shall be made by the Trust from the whole of the income distributed to him at the rate of fifteen per cent. of such income :
Provided that no deduction of income-tax, shall be made by the Trust, were the units in respect of which income is distributed to--
(i) an individual who is an Indian or a person of Indian origin, or
(ii) a Hindu undivided family ;
not resident in India, have been acquired from the Trust, out of funds in a Non-resident (External) Account maintained with any bank in India or by the remittance of funds in foreign exchange, in accordance, in either case, with the provisions of the Foreign Exchange Regulation Act, 1973, or any rules or orders made thereunder.
(3) Subject to the foregoing Sub-sections, for the purposes of the Income-tax Act, 1961.--
(a) any distribution of income received by a unitholder from the Trust shall be deemed to be his income by way of dividends ; and
(b) the Trust shall be deemed to be a company."
64. Section 4 of the said Act provides that the initial capital of the trust will be five crores of rupees to be contributed by the Reserve Bank of India, Life Insurance Corporation of India, State Bank of India and its subsidiaries and such other institutions, viz., scheduled banks and other financial institutions as may be notified by the Central Government. Only the institution specified in Section 4 can be said to be the contributing institutions. Section 32(1) of the said Act provides that Income-tax or any other tax is not payable on the income of the Unit Trust of India and in relation to certain income distributed by it to certain categories of persons. Sub-section (2) declares that the provisions of Sections 193 and 194 of the Income-tax Act, 1961, would not be applicable to the interest or dividend payable by the Unit Trust of India and also the income distributed to the unit-holder, who is an individual resident in India. The provision for deduction of tax is made in respect of the income distributed to an individual who is a non-resident in case such distribution exceeds Rs. 7,000, etc. Sub-section (3) of Section 32 starts with "subject to the foregoing Sub-sections". As per the said Sub-section, for the purposes of the Income-tax Act, 1961, any distribution of income received by a unitholder from the trust shall be deemed to be his income by way of "dividends" and the trust shall be deemed to be a "company". It is relevant to note that the Unit Trust of 'India Act does not anywhere say that the unit issued by the Trust must be deemed as a "share". The question then is by the mere fact that Sub-section (3), for the purposes of the Income-tax Act, states that the income received by a unitholder from the trust shall be deemed to be his income by way of dividends and that the trust shall be deemed to be a company whether it follows on the above that the unit must also be deemed as a share. This will depend on the construction of the provisions of Section 32 of the Act. "Unit" is defined to mean a unit issued under a unit scheme. "Unit capital" is defined to mean the aggregate of the face value of the units sold under a unit scheme and outstanding for the time being. "Unit certificate" is defined to mean a certificate issued to the purchaser of a unit under a unit scheme. "Unitholder" is defined to mean a person for the time being recognised by the trust as the holder of a unit certificate under a unit scheme and "unit scheme" is defined to mean a scheme made under Section 21. From the above it is clear that the trust issues the units under a scheme to be framed under Section 21 of the Act and the amount received by the issue of these units known as "unit capital" is the funds of the trust under those schemes. Section 32(3) of the Act provides that the income received by a unitholder shall be deemed to be his income by way of dividends. It also provides that the trust shall be deemed to be a company. At this juncture, for a full understanding of the scope of the provisions of Section 32(3) of the Unit Trust of India Act, it is necessary to refer to the provisions of the Income-tax Act, 1961 regarding dividend. Section 2(22) of the Act defines "dividend" as follows :
"2. In this Act, unless the context otherwise requires,--(22) 'dividend' includes-
(a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company ;
(b) any distribution to its shareholders by a company of debentures, debenture-stock, or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares, by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalised or not ;
(c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not ;
(d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not ;
(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or loan to a shareholder, being a person who has a substantial interest in the company, or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits ;
but 'dividend' does not include--
(i) a distribution made in accordance with Sub-clause (c) or Sub- Clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets ;
(ia) a distribution made in accordance with Sub-clause (c) or Sub- Clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, and before the 1st day of April, 1965 ;
(ii) any advance or loan made to a shareholder by a company in the ordinary course of its business where the lending of money is a substantial part of the business of the company ;
(iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of Sub-clause (e), to the extent to which it is so set off ;
Explanation 1.--The expression 'accumulated profits', wherever it occurs in this Clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956 ;
Explanation 2.--The expression 'accumulated profits' in Sub- Clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those Sub-clauses, and in Sub-clause (c) shall include all profits of the company up to the date of liquidation, but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place ;"
65. Section 8 of the Act deals with dividend income. It read as follows :
"8. For the purposes of inclusion in the total income of an assessee,--
(a) any dividend declared by a company or distributed or paid by it 'within the meaning of Sub-clause (a) or Sub-clause (b) or Sub-clause (c) or Sub-clause (d) or Sub-clause (e) of Clause (22) of Section 2 shall be deemed to be the income of the previous year in which it is so declared, distributed or paid, as the case may be ;
(b) any interim dividend shall be deemed to be the income of the previous year in which the amount of such dividend is unconditionally made available by the company to the member who is entitled to it."
66. Section 56 of the Act also is relevant in this context. Sub-section (1) and the material portion of Sub-section (2) are extracted below :
"56. Income from other sources.--(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head 'Income from other sources', if it is not chargeable to income-tax under any of the heads specified in Section 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of Sub-section (1), the following incomes shall be chargeable to income-tax under the head 'Income from other sources', namely :--(i) dividends."
67. Section 194 of the Act dealing with dividends, excluding the provisos, reads as follows :
"194. Dividends.--The principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, shall, before making any payment in cash or before issuing any cheque or warrant in respect of any dividend or before making any distribution or payment to a shareholder, of any dividend within the meaning of Sub-clause (a) or Sub-clause (b) or Sub-clause (c) or Sub-clause (d) or Sub-clause (e) of Clause (22) of Section 2, deduct from the amount of such dividend, income-tax at the rates in force."
68. A perusal of the definition of "dividend" in Section 2(22) would make it clear that only distribution by a company of accumulated profits to its shareholders in any of the forms mentioned in Clauses (a) to (e) of the said Sub-section will alone be dividend. A unitholder of the Unit Trust of India is not a shareholder, for, the Unit Trust of India Act nowhere treats the unit as a share. Section 32(3), which creates a fiction for treating the income from units as dividends and the trust as a company, does not provide for deeming the unit as a share. In the absence of such a deeming, a unitholder cannot be treated as a shareholder. Consequently, the definition of "dividend" in Section 2(22) of the Act is not attracted, for, as already stated, dividend means any distribution of profits of a company to a shareholder.
69. Section 8 of the Act provides that for the purpose of inclusion in the total income of an assessee, any dividend declared by a company, shall be deemed to be the income of the previous year in which it is so declared. Section 8 also provides that any dividend distributed or paid by a company within the meaning of Sub-clause (a) or Sub-clause (b) or Sub-clause (c) or Sub-clause (d) or Sub-clause (e) of Clause (22) of Section 2, shall be deemed to be the income of the previous year in which it is so distributed or paid. As already stated, Section 8 is in two parts. The first part deals with any dividend declared by a company. The second part deals with the income falling within the definition of "dividend" in Section 2(22) of the Act. By virtue of the fiction created by Section 32(3) of the Unit Trust of India Act deeming the income from units as dividend and the trust as a company, the first part of Section 8(a) mentioned above is attracted, thereby the income from units received by the unitholder shall be deemed to the income of the previous year in which it is so declared for the purpose of inclusion in the total income of the unitholder.
70. By virtue of the fiction created by Section 32(3) of the Unit Trust of India Act, the income from units is liable to be assessed under the head "Other sources" as provided in Section 56.
71. Section 194 casts an obligation on the company to deduct from the amount of dividend declared by the said company Income-tax at the rates in force. Here also, as in Section 8, the Section is in two parts. By the fiction created by Section 32(3) of the Unit Trust of India Act, the Unit Trust is liable to deduct tax on the distribution of income from units in advance. Now if we look to the provisions of Section 32 of the said Act, the purpose of the fiction created by Section 32(3) will be clear. Section 32(1) of the said Act provides that the trust shall not be liable to any income tax or any other tax in respect of any income, profits or gains derived by it from any source. It also provides that in the case of an individual who is an Indian but not a resident in India or in the case of a Hindu undivided family any income received by such individual in the previous year in respect of units acquired from the Trust remitted in an N.R.I, account with any bank in India, is not liable to be included in the total income of the individual. Sub-section (2) of Section 32, inter alia, provides that notwithstanding anything contained in Section 194 of the Income-tax Act, 1961, no deduction of income-tax shall be made by the Trust from the income distributed by it to a unitholder being an individual and where in the case of a unitholder being an individual who is not a resident in India the income in respect of units receivable by him from the trust during the financial year does not exceed Rs. 7,000, no deduction of income-tax shall be made by the unit trust from the income distributed to him and where it exceeds Rs. 7,000 deduction of income-tax shall be made by the Trust from the whole of the income distributed to him at the rate of 15 per cent. of such income. It is for this reason that Sub-section (3) of Section 32 starts with the expression "subject to the foregoing Sub-sections" and then says "for the purposes of 'the Income-tax Act, 1961, any distribution of income received by a unit-holder from the trust shall be deemed to be his income by way of dividends and that the Trust shall be deemed to be a company". Thus, it is clear that the fiction created by Sub-section (3) of Section 32 is created only for the purposes of assessment of dividend income under the Act and for deduction of tax at source. In other words, the legal fiction created by Section 32(3) of the said Act cannot be carried any further.
72. If the legislative intention was to treat the units as shares to attract all the incidents attached to the holding of a share in a company, the Legislature would have specifically said so, which is evident from Clauses (a) and (b) of Sub-section (3) of Section 32 of the Unit Trust of India Act. The Legislature was very well aware of the consequences of treating a unit as a share. A share, as observed by the Tribunal, is a bundle of rights and a shareholder is one who can exercise those rights on his own. Some of the rights attached to the shareholding are for the shareholder to participate in the affairs of the company, the right to elect the board of directors and the right to approve the accounts and to vote for the dividend. No such rights are conferred on the unitholder. In order to attract the provisions of the Explanation to Section 73 of the Income-tax Act, the assessee must deal in the purchase and sale of shares. Admittedly, the assessee was not dealing in shares and was dealing only in units. Since the units are not treated as shares either under the Companies Act or under the Unit Trust of India Act, the fact that the income received by the unitholder from the trust is deemed to be his income by way of dividends and the trust is deemed to be a company, will not make it a share. In that view of the matter, it has to be held that the provisions of the Explanation to Section 73 have no application to the instant case and the Tribunal was perfectly justified in holding that the Explanation to Section 73 is not attracted.
73. In this context, it is relevant to note that the Explanation to Section 73 was inserted by the Taxation Laws (Amendment) Act, 1975, with effect from April 1, 1977, so as to treat the business of purchase and sale of shares by companies, other than investment companies, banking companies or finance companies, as speculative business. The scope and effect of the Explanation was explained by the Board in Circular No. 204 dated July 24, 1976, ([1977] 110 ITR (St.) 21). Paragraph 19.2 of the said circular says that the object of this provision is to curb the device sometimes resorted to by business houses controlling groups of companies to manipulate and reduce the taxable income of companies under their control. It is also relevant to note that the Explanation was inserted by the said amending Act on the basis of the recommendations of the Wanchoo Committee. The relevant portion reads :
"A tax avoidance device often resorted to by business houses controlling groups of companies is manipulation of results from dealings in shares of the companies controlled by them. In our opinion, such manipulation in share dealings for the purpose of tax avoidance can be checked effectively if the results of dealings in shares by such companies are treated for tax purposes in a manner analogous to speculation. No doubt, companies whose main business activities centre around investment in shares will have to be left out. Accordingly, we recommend that the results of dealings in shares by companies, other than investment, banking and finance companies, should be treated in a manner analogous to speculation business."
74. It is also relevant to note that the Explanation introduces a legal fiction, that is to say, the activity of a company in the purchase and sale of shares of other companies, will be treated as speculation business by a legal fiction. The Explanation does not apply to an investment company or a company whose principal business is banking or money lending. From the objects, as stated hereinabove, it is clear that for the application of the said Explanation and to deem the activity of purchase and sale of shares, it is necessary that the shares so dealt with must be the shares of other companies. The expression "companies" used in that context must mean only companies incorporated under the Indian Companies Act as otherwise there is no question of any "shares" being issued by the company. The recommendations in the Wanchoo Committee Report and the object with which the Explanation is inserted make the above position clear. There is no question of any manipulation of results from dealing in shares of companies in the instant case since the Unit Trust of India is a trust created under the Unit Trust of India Act where there is no scope for controlling its affairs by any companies or manipulation of its results.
75. As already stated, Explanation 2 to Section 28 of the Act enacts that where speculation transactions carried on by an assessee are of such a nature as to constitute a business, the business (speculation business) shall be deemed to be distinct and separate from any other business. In such case, Section 73(1) provides that any loss in respect of the speculation business shall not be set off except against profits and gains, if any, of another speculation business. In other words, this loss cannot be set off against profits and gains from any non-speculative transactions. Since we have already held that the Explanation to Section 73 is not applicable to the instant case, the Appellate Tribunal was perfectly justified in allowing the loss of Rs. 22,69,700 as a business loss.
76. Question No. 1 referred by the Tribunal in the supplementary statement of case numbered as I. T. R. No. 43 of 1997 is regarding the correctness of the finding of the Tribunal that the expenditure incurred for the wife of the chairman-cum-managing director of the company for foreign travel is an allowable deduction. In the assessment in question the asses-see claimed deduction of a sum of Rs. 1,38,561 being the foreign travel expenses of Mrs. Gurmeet Kaur, wife of the chairman-cum-managing director of the assessee-company in the computation of total income. The Assessing Officer disallowed the same holding that there is no nexus with the business. The Commissioner of Income-tax (Appeals) confirmed the said disallowance following the decision of the Gujarat High Court in Bombay Mineral Supply Co. Pvt. Ltd. v. CIT [1985] 153 ITR 437 (Appex) and the decision of the Madras High Court in CIT v. T.S. Hajee Moosa and Co. [1985] 153 ITR 422. The Tribunal in further appeal following the Special Bench decision of the Tribunal in Glaxo Laboratories (India) Ltd. v. Second ITO [1986] 18 ITD 226 (Bom), allowed the claim of the assessee. According to the Revenue, Mrs. Gurmeet Kaur accompanied her husband, Sri Raunaq Singh, chairman-cum-managing director of the company, not for any business purposes and, therefore, the said amount cannot be allowed as a business expenditure. On the other hand, the assessee contended that Mrs. Gurmeet Kaur accompanied the chairman-cum-managing director, who was on his business tour for foreign countries, to enable him to discharge his social-cum-business obligations in an effective manner and therefore, it is a legitimate deduction allowable under Section 37 of the Act. The Tribunal, on a consideration of the materials available on record, observed that it is not the case of the Revenue that her going abroad with her husband was for private or personal purposes and that in fact the Income-tax Officer has simply disallowed the expenditure stating that the expenditure was not laid out for the purpose of business. The Tribunal also noted that the Commissioner of Income-tax (Appeals) has sustained the disallowance only on that count. The Tribunal further noted that boarding and lodging expenses were not claimed, that her foreign trip was approved by the board of directors and therefore, the business interest in such trip can be presumed and that otherwise there is no need for the board of directors of the company to approve her trip if it was only for private or personal purposes. The Tribunal further relied on the observations of the Special Bench of the Tribunal mentioned above and allowed the deduction. In this context, we will refer to the facts of the decision of the Madras High Court in CIT v. T.S. Hajee Moosa and Co. [1985] 153 ITR 422. In that case, the assessee claimed deduction of the expenses incurred on the wife of the senior partner of the assessee-firm accompanying him on a foreign tour. Admittedly, the senior partner was a diabetic patient and the wife was taken for the purpose of attending on him. While considering the said claim, the Madras High Court observed that in order to qualify for allowance under Section 37(1) of the Act, the whole of the expenditure must have been solely and exclusively incurred for business purposes and that if there is a dual purpose, then it is obvious that the expenditure would not qualify for allowance, for, it will cease to be wholly and exclusively laid out for business purposes. It further observed that in that case, the partner of the assessee is a diabetic and requires to be looked after and that the expenditure incurred is thus laid out in part for the advantage, benefit and well being of the partner of the assessee and it is distinct and different from the amount expended for purposes of business or trade. It was further observed that the attention given by the wife of the partner of the assessee, while on tour, would enure to his benefit and advantage, not only when he was engaged in his business activities, but even otherwise as a human being, so that at least in part, the expenditure incurred had been laid out for the advantage and benefit of the partner. Accordingly, it was held that in the absence of materials with reference to the securing of advantages, it cannot be presumed that such advantages resulted to the assessee in its business activities as a result of the foreign tour undertaken by the wife of the partner of the assessee which alone would justify the allowance of the expenditure as one appropriately falling under Section 37(1) of the Act. For taking the said view, the Madras High Court relied on the decision of the Gujarat High Court in Bombay Mineral Supply Co. Pvt. Ltd. v. CIT [1985] 153 ITR 437 (Appex.). That was also a case where the director of a company keeping indifferent health while undertaking the foreign tour, was accompanied by his wife in the tour. The question arose as to whether the expenditure incurred on foreign tour of the wife of the director is incurred for purposes of business. The Gujarat High Court observed that (page 439): ". . . tax collectors do not want to discourage business executives and managing directors from undertaking foreign tours for business purposes nor to deprive them of the company of their wives in such tours, but, for that we do not think that in law, it would be permissible for the Income-tax Officer to allow the expenses incurred for rendering such company, however necessary and enjoyable it may be from the point of view of personal needs of those executives." Relying on the decision of the Supreme Court in State of Madras v. G. J. Coelho [1964] 53 ITR 186, it held that these are all personal expenses and would not entitle the assessee-company to claim the same as business expenses.
77. But the Appellate Tribunal has relied on the decision of the Special Bench of the Tribunal in the case of Glaxo Laboratores (India) Ltd. v. Second ITO [1986] 18 ITD 226 (Bom), which distinguished the two decisions referred to above. It is the case of the assessee-company that the wife of the chairman-cum-managing director of the company accompanied him on his business tour and that the accompaniment was for the purpose of enabling him to discharge his social-cum-business obligations in an effective manner. The Special Bench observed that in the modern age, and more so in the western countries, the senior executives are, as a matter of social custom, accompanied by their wives when they visit, though for business purposes, has necessarily some social aspects also. Neither the assessing authority nor the appellate authority has got a case that the foreign tour made by the chairman-cum-managing director is not for any business purposes or that the accompaniment of the wife is not for the purpose of fulfilling the social aspects aforementioned, The authorities below also do not have a case that the accompaniment of the wife of the chairman-cum-managing director did not result in any advantage to the assessee. It is also relevant to note that the board of directors of the company, by resolution, have permitted the same.
78. We had occasion to consider almost a similar situation in I. T. R. No. 39 of 1995 (CIT v. Aspinwall and Co. Ltd. [1999] 235 ITR 106 (Ker)). We have noted that the Tribunal in that case took the view that the wife of the chief executive accompanied in a business travel and that there was no material to show that her travel was for any purpose other than business and that the Tribunal had taken note of the modern trend in which the senior executives are accompanied by their wives on visits for business purposes. Thereafter, we considered the decisions of the Madras and Gujarat High Courts discussed above and distinguished the said decisions. Relying on the factual finding entered by the Tribunal, we held that the dictum laid down by the Madras and Gujarat High Courts did not apply. In these circumstances, we do not find any illegality in the findings entered by the Tribunal which relate to question No. 1 in I. T. R. No. 43 of 1997.
79. First we will answer the questions referred to in I. T, R. No. 70 of 1994. We answer question No. 1 in the negative, i.e., in favour of the Revenue and against the assessee. We answer question No. 2 in the affirmative, i.e., against the Revenue and in favour of the assessee. We answer question No. 3 also in the affirmative, i.e., against the Revenue and in favour of the assessee.
80. Now we will answer the questions referred to in I. T. R. No. 43 of 1997. We answer question No. 1 in the affirmative, i.e., against the Revenue and in favour of the assessee, We answer question No. 2 in the affirmative, i.e., against the Revenue and in favour of the assessee. We answer question No. 3 also in the affirmative, i.e., against the Revenue and in favour of the assessee.
81. A copy of this judgment, under the seal of this court and the signature of the Registrar, shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.