Income Tax Appellate Tribunal - Indore
Assistant Commissioner Of Income-Tax vs S. A. Plant (P.) Ltd. on 28 August, 1997
Equivalent citations: [1998]66ITD32(INDORE)
ORDER
Shri Satish Chandra, AM
1. The appeal by the revenue arises out of the order dated 26-2-1993 of the CIT(Appeals)-I, Indore, pertaining to the assessment year 1989-90.
2. The assessee is a private limited company engaged in manufacture of PVC pipes. For the assessment year 1989-90, the assessee filed return on 28-12-1989 declaring loss of Rs. 2,35,292. Working of profits under section 115J did not accompany the return. During the course of assessment proceedings, the assessee filed working of profits under section 115J, according to which, the profit was worked out at Rs. 24,464.44 Ps. Assessing Officer found that the assessee had claimed depreciation at a higher rate than provided in Schedule XIV of the Companies Act. On query, it was submitted that depreciation was recalculated and the chart for the whole period of 21 months was prepared by the assessee after technical evaluation of plant and machinery, electric installations and the rates have been increased in view of the clarificatory Circular No. 2 of 1989 dated 7-3-1989 issued by the Company Law Board. In support, technical evaluation certificate from Chartered Engineer was filed. The submissions of the assessee were not acceptable to the Assessing Officer. According to him, technical evaluation is neither bona fide nor any disclosure has been made in the accounts in this regard. He expressed the view that there is no basis for charging depreciation for the whole of 21 months. The assessee ought to have provided for depreciation only for a period of 10 1/2 months as per Schedule XIV of the Companies Act. By allowing the depreciation accordingly, the Assessing Officer worked out profit under section 115J at a higher figure of Rs. 1,77,169. Aggrieved thereby, the assessee appealed.
3. Before the CIT(Appeals), the assessee filed written submissions. On consideration thereof, the CIT(Appeals) observed that as per section 115J, the assessee is required to prepare its profit and loss account as per Parts II and III of Schedule VI and accordingly, the assessee is required to provide for depreciation. He further observed that as per section 349(4)(k) of Companies Act, the assessee is required to provide for depreciation as per section 350 read with Schedule XIV. Accordingly to him, section 355 states that provisions of sections 348 to 354 of Companies Act do not apply in the case of a private limited company unless it is a subsidiary of a public limited company. After going through Circular No. 2 of 1989 dated 7-3-1989 issued by the Company Law Board, the CIT(Appeals) expressed the view that it is clear therefrom that the assessee is required to provide for minimum depreciation as per Schedule XIV but there is no bar to provide any higher depreciation. He also noted that there is no provision in section 115J for making any alteration in the depreciation provided for by the assessee in the profit and loss account. He, therefore, held that the Assessing Officer should take into account the depreciation as provided for in the profit and loss account by the assessee and work out the profit under section 115J accordingly. The revenue is dissatisfied with the above findings of the CIT(Appeals).
4. The learned D.R. supported the order of the Assessing Officer and submitted that the assessee had claimed excessive depreciation. He highlighted the point that the technical evaluation was done after the close of the accounting period with a view to reduce the book profit. Moreover, section 115J does not preclude the Assessing Officer from examining the depreciation provided by the assessee in its books in case an incorrect claim is made. He, therefore, urged that the order of the CIT(Appeals) be set aside. In oppugnation, the learned counsel for the assessee submitted that as per Companies Act, the assessee had two previous years - one ending on 30-6-1988 (12 months) and the other ending on 31-3-1989 (9 months). The assessee had, therefore, to provide for depreciation as per Schedule XIV for the whole period of 21 months and the assessee provided for depreciation accordingly as per W.D.V. method, which is a duly recognised method of providing depreciation. He took us through the provisions of section 205 of the Companies Act and submitted that this section provides for declaration and payment of dividend which has to be only out of profits of the company for any financial year after providing for depreciation in accordance with the provisions of sub-section 2, etc. Proviso (a) thereto is inapplicable to the case of the assessee-company as it has provided for depreciation as per W.D.V. method. Likewise proviso (b) talks of carry forward of loss or depreciation. It does not cover depreciation provided for the year of account. According to him, the case of the assessee is covered by the provisions contained in (b) & (c) of sub-section (2) of section 205. He further submitted that the provisions of section 350 of Companies Act are not applicable to private companies which is clear from section 355 which says that sections 348 to 354 shall not apply to a private company unless it is a subsidiary of a public company. According to the Ld. counsel for the assessee, the assessee is a private limited company and it is not a subsidiary of any public company.
4.1 The learned counsel for the assessee further submitted that as per sub-section (1A) of section 115J, the assessee-company has to prepare its profit and loss account in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. Inviting our attention to item (iv) of Part II of Schedule VI, the learned counsel for the assessee submitted that the depreciation has to be provided for. If, however, 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 the section 205(2) of the Act shall be disclosed by way of a note. According to him, the depreciation has to be provided for but the above item (iv) does not make mention of any rate of depreciation. He stressed that item (iv) is not applicable to the case of the assessee, as the assessee has provided for depreciation as per W.D.V. method as per (b) & (c) of sub-section (2) of section 205 of the Companies Act.
4.2 The learned counsel for the assessee further submitted that the assessee is entitled to provide depreciation for the two periods as stated above under Companies Act. Moreover, the Circular No. 2 of 1989, dated 7-3-1989 issued by Company Law Board is binding on Companies. He laid emphasis that it is incorrect on the part of the Assessing Officer to observe that the assessee had provided excess depreciation as Part II of Schedule VI does not provide for rate of depreciation. Moreover, as per Circular No. 157(3) on the basis of a bona fide technical evaluation higher rates of depreciation than the rates specified in Schedule XIV may be provided for with proper disclosure by way of a note forming part of annual account. He vehemently argued that there cannot be any alteration in profit and loss account and balance sheet for the purpose of working out the book profit except as provided in section 115J itself. He clarified that clause (iv) which speaks of carry forward of loss or depreciation whichever is less is not applicable to the case of the assessee, as the assessee has only provided for depreciation of the current year. He, thus, supported the order of the CIT(Appeals).
5. We have considered the rival submissions. We have also examined thoroughly the orders of the authorities below. A bare reading of the provisions of section 115J would go to reveal that section 115J(1) provides that in the case of an assessee being a company, if the total income of the previous year is less than 30 per cent. of its book profit, then, total income of such company shall be deemed to be an amount equal to 30 per cent. of such book profit, and such income shall be chargeable to tax. The assessee has to first compute the total income in accordance with the Income-tax Act and if the total income is less than 30 per cent. of the book profit, then it has to prepare a profit and loss account under section 115J(1A) for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act. The book profit so arrived at as per profit and loss account under the Companies Act, shall be adjusted by addition to the various amounts enumerated under clauses (a) to (ha) of the Explanation to section 115J(1A) and reduced by the amounts mentioned under clause(s) (i) to (iv) of the Explanation. In the case of the instant assessee, the total income for the assessment year 1989-90 was in negative and hence, computation under section 115J was required to be made. Accordingly, the assessee filed computation under section 115J before the Assessing Officer, according to which book profit was computed at Rs. 24,464.44 Ps. As per Explanation to section 115J(1) book profit means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (1A) which provides that a company shall prepare its profit and loss account in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. Part II of Schedule VI to the Companies Act set out the requirements as to profit and loss account. Sub-clause (iv) of section 3 thereon is as follows :
"(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."
6. It would be seen from the above that the requirement as to profit and loss account as per Part II of Schedule VI is to set out the amount provided for depreciation and if no provision is made for depreciation, this fact as also the quantum of arrear of depreciation computed in accordance with section 205(2) of the Companies Act has to be disclosed by way of a note. The case of the assessee is that it has provided for depreciation as per W.D.V. method, which is a recognised method of depreciation. There is force in the arguments of the learned counsel for the assessee that sub-clause (iv) of section 3 of Part II of Schedule VI does not prescribe rate of depreciation and objection of the Assessing Officer is that depreciation has been charged at a rate higher than that provided in Schedule XIV of the Companies Act. No doubt, the companies are now required to provide for depreciation as per the rates prescribed in Schedule VI for purposes of Companies Act and the rates of depreciation under Schedule XIV have come into force from 2-4-1987. Nonetheless in its Circular No. 2 of 1989 dated 7-3-1989, the Department of Company Affairs issued the following clarification :
"Department's Clarification on Schedule XIV
1. Can higher rates of depreciation be charged ? - It is stated that Schedule XIV clearly states that a company should disclose depreciation rates if they are different from the principal rates specified in the Schedule. On this basis, it is suggested that a company can charge depreciation at rates which are lower or higher than those specified in Schedule XIV.
It may be clarified that the rates as contained in Schedule XIV should be viewed as the minimum rates, and, therefore, a company shall not be permitted to charge depreciation at rates lower than those specified in the Schedule in relation to assets purchased after the date of applicability of the Schedule. However, if on the basis of a bona fide technological evaluation, higher rates of depreciation are justified, they may be provided with proper disclosure by way of a note forming part of annual account."
Thus, as per the above clarification, higher rates of depreciation may be provided on the basis of technological evaluation. The assessee submitted before the Assessing Officer that it provided for higher rate of depreciation on the basis of technological evaluation and filed a certificate issued by the Chartered Engineer. The Assessing Officer rejected the said technological evaluation certificate on the basis of irrelevant considerations and ignored the plea of the assessee that the technological evaluation had the approval of the board of directors and that the assessee had made disclosure in the annual accounts about the depreciation method followed and also the depreciation rates or the useful lives of the assets as adopted by the assessee-company, they being different from the rates of depreciation specified in Schedule XIV. His observation that disclosure of higher rate of depreciation provided by the assessee has not been made in accounts is contradicted by his remarks that auditors in their report dated 5-12-1989 have noted charging of depreciation higher by Rs. 2,39,373. Further, the Department of Company Affairs which issues clarifications and instructions for smooth working of the Companies Act are binding on the authorities working under it. Its functions are akin to some of the functions of CBDT in tax matters. If that be so, it cannot be said that the circular of the Department of Company Affairs can be of no help to the assessee as stated by the Assessing Officer. We, therefore, hold that charging of depreciation at a higher rate than that provided in Schedule XIV of the Companies Act on the basis of technological evaluation with disclosure in the accounts is proper.
7. Coming to the other objections of the Assessing Officer that there is no basis for charging depreciation for 21 months we observe that in the statement of case filed before the CIT(Appeals) it was stated that the assessee-company was incorporated on 6-5-1986 and that the first year of the company ended on 30-6-1987. In the absence of any rebuttal by the revenue, the above statement has to be accepted as correct. We are presently concerned with assessment year 1989-90, previous year of which consisted of 21 months in two parts - from 1-7-1987 to 30-6-1988 (12 months) and from 1-7-1988 to 31-3-1989 (9 months). The case of the assessee all along has been that it has provided for depreciation for 21 months as per Schedule XIV to the Companies Act which came into force w.e.f. 2-4-1987. For the purpose of Company Law, the assessee-company has to make depreciation calculation as per Schedule XIV which would be different from the one prepared for the purposes of income-tax. It is, therefore, incorrect to say that depreciation calculated for a period of 21 months as per Schedule XIV had no basis.
8. For the reasons aforesaid and agreeing with the findings of the CIT(Appeals), we hold that there is no infirmity in the direction of the CIT (Appeals) to the effect that depreciation as provided for in the profit and loss account by the assessee should be considered for working out the book profit under section 115J. Accordingly, we reject the appeal of the revenue.
9. In the result, the appeal is dismissed.