Income Tax Appellate Tribunal - Ahmedabad
Assistant Commissioner Of Income Tax vs Bell Ceramics Ltd. on 24 August, 1998
Equivalent citations: [1999]69ITD156(AHD)
ORDER
N. Barathwaja Sankar, A.M.
1. This is an appeal filed by the Revenue relating to the asst. yr. 1990-91 against the order of the learned CIT(A) and there are five grounds of appeal.
2. The first ground of appeal is against the decision of disallowance of Rs. 40,722 made under s. 37(3) of the IT Act r/w r. 6B in respect of gift articles.
2.1. The assessee-company, M/s Bell Ceramics Ltd. filed its return of income for the asst. yr. 1990-91 on 31st December, 1990, along with audited report under s. 44AB of the Act in the prescribed form No. 3DB. In the statement of particulars in Form 3CD the assessee-company had given the details of articles presented in excess of Rs. 200 amounting to Rs. 40,722. It was stated by the assessee-company that the above expenses were not intended for advertisement and were meant for promoting business relations. However, the AO did not accept the explanation given by the assessee and applying the provisions of r. 6B of the IT Rules, made an addition of Rs. 40,722 to the total income of the assessee-company.
2.2. On appeal the first appellate authority deleted the impugned addition relying on certain judicial decisions.
2.3. Aggrieved, the Department is on second appeal before us now. The learned Departmental Representative relied on the order of the AO. The learned counsel for the assessee Shri S. N. Soparkar reiterated the contentions made before the first Appellate Authority and vehemently argued that these articles were not meant for advertisement. He also relied on the decision of the Hon'ble Bombay High Court in the case of CIT v. Allana Sons (P) Ltd. (1995) 216 ITR 690 (Bom).
2.4 We have considered the rival submissions, facts and materials including the decision of the Bombay High Court cited supra. On consideration of the facts and circumstances in totality in the light of the decision of the Bombay High Court we are satisfied that the claim of the assessee as upheld by the CIT(A) should prevail over the order of the AO and as such we uphold the order of the CIT(A) in deleting the disallowance of Rs. 40,722.
3. The next ground of appeal is against the deletion of disallowance of Rs. 94,203 made under s. 37(4) r/w s. 37(5) of the Act, on account of guest house expenses. While framing the assessment order, the AO found that the assessee-company had debited expense of Rs. 1,09,300 by way of rent and maintenance charges incurred by the company for its executives who visited their plant. The assessee contended that the expenditure was allowable under s. 30 of the Act and not covered under s. 37(4). The AO however did not accept the contention of the assessee and applying the provisions of s. 37(4) made an addition of Rs. 94,203.
3.1. The assessee went on appeal before the CIT(A) who deleted the impugned addition and now the Department is before us for adjudication on this issue.
3.2. We have heard the rival submissions and perused the materials on record before us. Now the point at issue is squarely governed by the decision of Andhra Pradesh (sic-Gujarat) High Court in the case of CIT v. Maharana Mills Ltd. (1994) 208 ITR 972 (Guj) wherein it was held as follows "In order to attract the provisions of sub-s. (4) of s. 37, it must first be established that it is an expenditure which is covered by s. 37(1). Sec. 37(1) refers to expenditure (i) which is not an expenditure of the nature described in s. 30; (ii) which is not an expenditure of capital nature; and (iii) which is not the personal expenditure of the assessee."
Also it has been held in CIT v. Ahmedabad Mfg. & Calico Mills Ltd. (1992) 197 ITR 538 (Guj) that the expenditure for residential accommodation in nature of guest house taken on rent used for temporary stay of employees while on duty, rent paid for premises and expenditure for repairs cannot be disallowed under s. 37(4) or 37(3) as it falls under s. 30 and is allowable.
3.3. Following the decisions cited supra we are not inclined to interfere with the decision of the first appellate authority in allowing the claim of the assessee on this ground.
4. The third ground of appeal reads as follows :
"On the facts and circumstances of the case and in law, the learned CIT(A) erred in holding, that the amount of subsidy should not be deducted from the cost of assets for the purpose of depreciation and investment allowance." Now the law is well settled and this ground of appeal is squarely governed by the decision of the Hon'ble Supreme Court in the case of CIT v. P. J. Chemicals Ltd. (1994) 210 ITR 830 (SC) in favour of the assessee and against the Revenue. Accordingly we decline to interfere.
5. The fourth ground of appeal reads is under :
"On the facts and in the circumstances of the case and in law the learned CIT(A) erred in directing to recompute the book profit under s. 115J of the IT Act, as per the P&L a/c to be prepared adopting the WDV method for depreciation as against the straightline method consistently adopted and thus ignoring the profit declared by the assessee-company as per the annual report". The assessee is a private limited company with previous year ending on 31st March, 1990. In the printed copy of the P&L a/c laid before the annual general meeting it had charged depreciation on straightline method. However in the P&L a/c prepared for the purpose of 115J, it had adopted WDV method for depreciation as provided for in the IT Act. The AO proceeded on the basis of the printed copy of the P&L a/c to determine the book profits under s. 115J. This was objected to by the assessee and upheld by the CIT(A) following his predecessor's decision in the case of Anagram Finance Ltd. (Appeal No. CIT(A)V/DC(A)I/15/91-92 dt. 26th November, 1991.
5.1. The Revenue is aggrieved. The learned Departmental Representative submitted that when the financial year of the assessee under the Companies Act coincide with the previous year under the IT Act, there was no legal requirement for the assessee to prepare separately a P&L a/c in accordance with the provisions of Part II and part Ill of Sch. VI to the Companies Act, He explained that sub-s. (1A) was inserted subsequently W.e.f. 1st April, 1989, to get over the difficulty caused in cases where the financial year under Companies Act does not coincide with the previous year under the IT Act. It has no application to companies whose financial year under the Companies Act and the previous year under the IT Act are one and the same.
5.2. The learned Departmental Representative further submitted that the assessee cannot adopt a method of depreciation different from the method of depreciation adopted in the printed copy of the P&L a/c laid before the annual general meeting. The rate or the method should be the same both for purpose of s. 115J and for purposes of annual general meeting and in this context he relied on the decision of the Delhi Bench of the Tribunal in Oswal Agro Mills Ltd. v. Dy. CIT (1994) 51 ITD 447 (Del).
5.3. The learned counsel for the assessee stated that assessment year being 1990-91, s. 115J(1) should be read with sub-s. (1A) thereunder. There is nothing in the language of s. 115J(1) or in sub-s. 115J(1A) to suggest that P&L a/c should be the same as is placed before the annual general meeting. Neither sub-s. (1) nor (1A) or even the explanation thereunder has reference to the P&L a/c placed or approved at the annual general meeting. There is no warrant in the language of s. 115J to hold that the P&L a/c prepared in accordance with the provisions of Part 11 and Part III of Sch. VI to the Companies Act for the purposes of s. 115J should adopt the same rate or method of depreciation as were adopted in the annual accounts (comprising P&L a/c and balance sheet) which are placed before the annual general meeting, in contradistinction to such condition as was spelt out in the first proviso and second proviso of sub-s. (2) of s. 115JA which was inserted by the Finance (No. 2) Act of 1996 w.e.f. 1st April, 1997. Therefore he submitted that the assessee is free to adopt a different rate or method of depreciation for the preparation of P&L a/c for the purposes 6f s. 115j so long as the P&L a/c is in conformity with the requirements of Part 11 and Part III of Sch. VI to the Companies Act.
5.4. In the instant case we are concerned with the asst. yr. 1990-91 for which s. 115J(1) r/w s. (1A) is applicable. The issue before us is whether the assessee, being a company, in preparing the P&L a/c for the purpose of s. 115J is to adopt the same rate or same method of depreciation which was adopted in the P&L a/c placed before the annual general meeting.
5.5. Sub-s. (1A) of s. 115J is as follows :
"Every assessee, being a company, shall, for the purpose of this section, prepare its P&L a/c for the relevant previous year in accordance with the provisions of Parts H and M of Sch. VI to the Companies Act, 1956 (1 of 1956)."
5.6. The learned Departmental Representative contends that this sub-section was enacted only to get over the difficulty in cases where the financial year of the assessee under the Companies Act is different from the previous year under the IT Act. Therefore, the question of preparing the P&L a/c separately for purposes of s. 115J cannot and will not arise for companies whose financial year under the Companies Act and the previous year under the IT Act are one and the same. This appears to be the intention in inserting sub-s. (1A) as explained in CBDT's Circular No. 559 dt. 1st January, 1990. However, it is regretable that such intention is not spelt out in the language of the sub-section as it is not prefaced by some such expression as "where a company has adopted or adopts the financial year under the Companies Act which is different from previous year under the IT Act". It is not for the Court to supply the omissions. On the other hand, sub-s. (1A) starts with the expression "every assessee being a company" and is punctuated with the expression "for the purpose of this section". The mandatory word "shall" lies in between the two expressions. Even the Explanation under s. 115J defining the "book profits" only refers to "P/L a/c prepared under sub-s. (1A)". In none of these sub-sections of s. 115J reference is made to P&L a/c laid before the annual general meeting.
5.7. At this point of discussion it would be relevant to consider the provisions of s. 115JA. Sec. 115J was scrapped w.e.f. 1st April, 1991 and made a re-entry in a slightly different form w.e.f. 1st April, 1997, as s. 115JA. Sub-s. (2) of the new 115JA reads as follows :
"Sec. 115JA(2). - Every assessee being a company, shall for purposes of this section, prepare its P&L a/c for the relevant previous year in accordance with the provisions of Parts II and Ill to the Sch. VI to the Companies Act, 1956 (1 of 1956) :
Provided that while preparing the P&L a/c 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 P&L a/c laid before the company at its annual general meeting in accordance with the provisions of the Companies Act, 1956 (1 of 1956) :
Provided further that where a company had adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956) which is different from the previous year under the Act, the method and rates which have been adopted for calculating depreciation for such financial year or part of such financial year falling within the relevant previous year."
5.8. On a comparison it will be evident that :
(a) the main part of sub-s. (2) of s. 115JA is the same as sub-s. (1A) of 115J.
(b) The proviso found in sub-s. (2) of s. 115JA are not to be found in sub-s. (1A) of S. 115J.
(c) This first proviso cited supra refers to P&L a/c laid before the annual general meeting of the company, a reference not found in s. 115J(1) or (1A).
(d) The proviso puts a condition that the same rate or same method of depreciation are to be adopted both in the P&L a/c prepared for purposes of s. 115JA and in the P&L a/c laid before the annual general meeting. (such a condition is not found is 115J(1) or (1A).
(e) The second proviso to sub-s. (2) of s. 115JA specifically refers to a company whose financial year under the Companies Act does not coincide with the previous year under the IT Act - a contingency not mentioned in 115J(1) or (1A).
5.9. For all these reasons we hold that sub-s. (1A) of s. 115J as it stood for the asst. yr. 1990-91 covers every assessee being a company, no matter whether the financial year under the Companies Act and the previous year under the IT Act coincide with each other or not or the mandate of the sub-section is for every assessee being a company to prepare its P&L a/c for purpose of s. 115J in accordance with the provisions of Parts II and Ill of Sch. VI to the Companies Act and that there is no further requirement that the P&L a/c so prepared should be same or similar to the P&L a/c placed before the annual general meeting of the company.
5.10. The rates of depreciation mentioned in Sch. XIV of the Companies Act are the minimum rates of depreciation and the companies are free to adopt any rate not below the rate prescribed as per the clarification of Company Law Board. Further WDV method of depreciation is also an approved method under Sch. XIV of the Companies Act. Moreover the rates mentioned in Sch. XIV are relevant for purposes of s. 205 (dividend declaration) and 350 (managerial remuneration) of the Companies Act. As a matter of fact s. 350 is not applicable to the assessee, it being a private limited company. Lastly parts 11 and Ill of Sch. VI to the Companies Act does not require that the rate or method of depreciation prescribed in Sch. XIV should be adopted for preparing the P&L a/c.
5.11. In the light of our discussions, we uphold the order of the CIT(A) and the Revenue's appeal fails on this issue.
6. The last ground of appeal is against the direction not to charge interest under s. 234B of the IT Act. This issue is now squarely governed by the decision of the Ahmedabad Bench of the Tribunal in the case of Samir Diamond Mfg. Co. v. Asstt. CIT (1997) 59 TTJ (Ahd) 1 wherein it was held as under :
"Sec. 115J purports to tax an amount by creating a legal fiction. The fiction has been created for a definite purpose and it will not operate beyond its field. Moreover unless the books of accounts are completed and book of profits are determined one will not know as to whether he is liable to pay any tax under s.
115J. Such an eventuality is not known at the time when advance tax is payable. Accordingly there is no liability to interest under s. 234B on income determined under s. 115J."
Following the decision of the Tribunal we are inclined to uphold the decision of the first Appellate Authority.
7. In the result the appeal by the Revenue is dismissed.