Income Tax Appellate Tribunal - Jaipur
Vijay Solvex Ltd. vs Assistant Commissioner Of Income-Tax on 13 September, 2004
Equivalent citations: [2005]92ITD24(JP)
ORDER
Dinesh K. Agarwal, Judicial Member
1. This appeal is preferred by the assessee against the order passed by the CIT(A), Rajasthan-I, Jaipur, dated 18-10-1993.
2. The brief facts of the case are that the assessee, a Public Limited Company, derives income from manufacturing and sale of edible oil through its Solvent Extraction Plant & Oil Refinery.
3. At the time of hearing, the ld. A.R. made a request for admission of an Additional Ground of Appeal, which is reproduced as under :
That the Assessing Officer has erred in law as well as on facts in charging interest under Sections 234B and 234C of the Income-tax Act, 1961 on the income computed under Section 115J of the Income-tax Act, 1961.
4. The ld. A.R. submits that it is a legal ground based on the decision of the Hon'ble Karnataka High Court in the case of Kwality Biscuits Ltd. v. CIT [2000] 243 ITR 5191 and since no fresh clarification on facts is needed, therefore, the same may be admitted.
5. The ld. D.R. submits that he has no objection on the admission of this Additional Ground of Appeal.
6. After hearing the rival parties and perusing the records, we find that this issue was decided by the CIT(A) against the assessee but the assessee did not consider to agitate this issue further and now in view of the decision in the case of Kwality Biscuits Ltd. (supra), the assessee wants to raise the issue before us. Since no new evidence or investigation is required and the facts are already on record, we, therefore, entertain this Additional Ground of Appeal, as raised by the assessee, as Ground No. 3.
7. In the Ground No. 1, the assessee claims that the deductions under Sections 80HH and 80-I are to be allowed out of profits and gains of the Industrial Undertakings without deducting therefrom the depreciation, unabsorbed losses, unabsorbed depreciation etc.
8. The Assessing Officer was of the view that the assessee company has returned net loss at Rs. 1,11,559, after deducting depreciation of Rs. 72,28,897, therefore, the resultant figure of profit and gains remains negative, hence no deduction under Sections 80HH and 80-I is allowed. In support of it, the Assessing Officer has cited the decision of ITAT, Jaipur Bench in ITA No. 1173/JP/1987 dated 18-7-1990 in the case of assessee's sister concern Vijay Industries Co., Khairthal.
9. On first appeal, the CIT(A) has upheld the order of the Assessing Officer on this account and his conclusions, as arrived at videpara 5.2 of the order dated 18-10-1993, are reproduced as under :
5.2 After due consideration, it appears that the plea of the appellant is without any merit and the treatment so meted out in the impugned assessment order by rejecting the claim for relief under Sections 80HH and 80-I is well justified.
After insertion of the provisions of Section 80AB w.e.f. 1-4-1981, the deduction under Sections 80HH to 80-II (except Section 80M) is to be allowed with reference to the net income and the net income means the income arrived at after making the deductions on account of depreciation, unabsorbed losses, unabsorbed depreciation etc., etc. In the case of the appellant, the resultant figure was minus and in view of the same, the relief under Sections 80HH & 80-I was not available to the appellant. This is also duly supported by the decision of Kerala High Court reported in 165 ITR 174, the decision of Supreme Court reported in 155 ITR 120 wherein the earlier decision reported in 113 ITR 94 was approved. Taking into consideration all these facts as also the decision of the ITAT in the case referred to in the impugned assessment order, the rejection of appellant's claim for relief under Sections 80HH and 80-I appears to be well justified and calls for no interference. Hence, the plea of the appellant is rejected.
10. Being aggrieved by the order of the CIT(A), the assessee is in appeal before us.
11. The ld. A.R. submits that the departmental authorities are taking a very narrow meaning of gross total income and that the beneficiary provisions of Chapter VIA should be interpreted liberally and benefits should be allowed to the assessee. It was also argued that deductions under Chapter VIA should be allowed out of commercial profits, before allowing the claim of deductions of carried forward unabsorbed losses. He further submits that he is aware that the Hon'ble Supreme Court of India has decided this issue against the assessee in the case of Motilal Pesticides (I) (P.) Ltd. v. CIT [2000] 111 Taxman 83 (SC) and by the Hon'ble Rajasthan High Court in the case of CIT v. Loonkar Tools (I) Ltd. [1995] 213 ITR 721 and also in CIT v. Vishnu Oil & Dal Mills [1996] 218 ITR 71 but still he feels that the said decisions require reconsideration and review, therefore, he is agitating this issue in order to keep the matter alive.
12. On the other hand, the ld. D.R. strongly supports the orders of the authorities below and submits that now the Hon'ble Supreme Court of India has settled this issue in favour of the Department as cited by the ld. A.R. and also in the following cases :
1. CIT v. Kolagiri Industrial Co-operative Tea Factory Ltd. [1997] 224 ITR 604' (SC)
2. H.H. Sir Rama Varma v. CIT[1994] 205 ITR 4332 (SC)
3. CIT v. Swaran Singh Kanwar [1998] 232 ITR 350 (SC)
4. Modern Suitings Ltd. v. Asstt. CIT[IT Appeal No. 206 (Jp.) of 1993 dated 30-11-1999].
13. We have heard the rival parties and have gone through the various case laws relied upon by them. We are of the opinion that scheme of the Act is such that the gross total income as defined under Section 80B(5) for the purpose of Chapter VIA means that total income computed in accordance with the provisions of the Act without making any deduction under Chapter VIA. The learned authors, Chaturvedi & Pithisaria's in Vol. 2, Fourth Edition of their Book 'Income-tax Law' page 2416. "Computed in accordance with the provisions of the Act" implies -
(1) that deductions under appropriate computation sections have already been given;
(2) that income of other persons, if includible under Sections 60 to 64, has been included;
(3) that intra-head and/or inter-head losses have been adjusted; and (4) that unabsorbed business losses, etc., unabsorbed depreciation, unabsorbed investment allowance, etc., have been set off.
In order to arrive at the taxable income, the deductions provided in Chapter VIA are to be given from the amount of such gross total income and such taxable total income and not the gross total income supplies the base for the levy of the tax.
14. After having examined the various case laws, we are of the opinion that the Hon'ble Apex Court has more than one occasion clarified the position that the gross total income worked out under Chapter VIA would mean the income after allowing deductions under various sections of the Act upto Chapter VI itself. This would, therefore, mean that deductions under Chapter VIA are to be allowed on the net income worked out after allowing deductions including carried forward/brought forward losses under various heads. In the present case, since the total income of the assessee for the year under appeal is negative, no deductions under Chapter VIA can be allowed. We, therefore, hold that the order of the CIT(A) is reasonable and justified and hence we decline to interfere on this account.
15. In the next ground, the assessee has objected the computation of book profit under Section 115J of the Income-tax Act by taking following Grounds of Appeal:
2(a) That the CIT(Appeals), Rajasthan, has erred in law as well as on facts in holding that for the purposes of computation of book profits under Section 115J of the Income-tax Act, substitution of depreciation as per Schedule IVX of the Companies Act in place of depreciation as changed to Profit & Loss A/c. by the assessee company as per the rates prescribed under the Income-tax Rules was correct.
2(b) That the Commissioner of Income-tax has erred in law as well as on facts in confirming the computation of book profits under Section 115J as made by the Asstt. Commissioner of Income-tax by recasting the Profit & Loss A/c., which was prepared in accordance with the Schedule VI Parts II and III of the Companies Act, 1956.
16. The brief facts of this Ground of Appeal are that the Assessing Officer found that the assessee company has shown book profit as nil in the Return of Income whereas the assessee company was required to compute book profit in accordance with the provisions of the Companies Act, 1956. He further noticed that the assessee company has not drawn the computation of depreciation in accordance with the provisions of Part II and Part III of the Sixth Schedule to the Companies Act, 1956 to avoid the levy of income-tax under Section 115J of the Income-tax Act, 1961. Accordingly, the Assessing Officer computed the book profit under Section 115J as under :
Declared net loss as per P & L Account (-) 1,11,559 Add : Excess depreciation debited in P & L A/c. in contravention of Schedule XIV of the Companies Act, 1956 as per following Chart:
44,59,907
----------------------------------------------------------------------------------------
Asset WDV Depreciation Depreciation Excess
claimed as in accordance depre-
per I.T. Act with sec. 205(2) ciation
of the Co.'s Act claimed
as per Sch. XIV
----------------------------------------------------------------------------------------
Land 250000 - - - -
Building 4045121 404512 @ 10% 404512 -
Plant &
Machinery 15594893 6776166 @ 15% 2339234 4436932
Laboratory
Equipments 80260 26751 @ 15% 12039 14712
Misc. Assets 28175 9391 @ 15% 4227 5164
Furniture &
Fixture 43289 4328 @ 10% 4328 -
Vehicle 23250 7749 @ 20% 4650 3099
-------------- --------------------------
7228897 2768990 4459907
-------------- --------------------------
Book Profit for the purpose of Section 115J of the Income-tax Act : 4348348
Since the book profit was more than the total income computed otherwise, the tax was levied on the 30% of the book profit by the Assessing Officer.
17. On first appeal, the CIT(A), while discussing the issue at length, has confirmed the Assessing Officer's finding. His conclusions, as arrived at vide para 6.2 of his order, supra, are reproduced as under :
6.2 After due consideration, it appears that the plea of the appellant is misconceived and the concerned authority was well justified in invoking the provisions of Section 115J on the ground of having not complied with the provisions of Parts II & III of VI Schedule of the Companies Act, 1956. It may be seen that as per the provisions of Section 205 of the Companies Act, it is specifically provided that depreciation is to be provided for to the extent specified in Section 350 and it is on this basis that dividends can be declared with effect from 16-6-1988. Certain amendment was brought in connection with the provisions of Section 205 for providing depreciation to arrive at the profit for the purpose of declaring dividends, and it has the effect of delinking the provisions for depreciation to be made for determining distributable profits for the purpose of declaration of dividends as per Section 205 as also for determining net profits under Section 349 for computing the managerial remuneration. Further, for purposes of Companies Act, depreciation has now to be calculated in accordance with the rates specified in Schedule XIV. As per the rate in Schedule XIV, the claim on account of depreciation is to be debited to the profit & loss account. This clearly shows that the profit & loss account was not prepared in accordance with the provisions of Indian Companies Act and by making a higher claim of depreciation, the appellant wanted to hoodwink the Deptt. by showing no tax liability with reference to the book profit. It is no doubt that under the provisions of Companies Act, higher rate of depreciation can be claimed by making the bona fide technical evaluation and a note is to be given justifying the claim of depreciation at higher rates. In the case of the appellant, there is no iota of any evidence to show as to there being any bona fide technical evaluation justifying the higher rate of depreciation. On the contrary, perusal of the auditors report in Schedule K only shows that depreciation has been claimed as per the Income-tax Rules. The observation so made in the auditors report is a mere eye wash and cannot be taken at all as a justification in claiming a higher rate of depreciation on account of any bona fide technical evaluation. The claim of depreciation at higher rates in the case of the appellant is not supported by any bona fide technical evaluation which is a sine qua non for such a claim.
In view of this, the circular issued by the Company Law Board, as also the guidelines provided by the Institute of Chartered Accountants of India referred to above cannot come to the rescue of the appellant inasmuch as they specifically provided for giving a note by way of such evaluation. As such, the reference made by the appellant to the circular as also the guidelines of the Institute of Chartered Accountants of India is of no avail. As per the provisions of Companies Act, providing of depreciation is necessary and if no depreciation is provided, then the reasons thereof are to be given. In the case of the appellant, depreciation was provided for but in contravention of the Schedule XIV of Indian Companies Act, 1956. In view of this, the plea of the appellant of there being no mandatory provisions for providing of depreciation or having provided for depreciation correctly is misconceived notion. There is of course no prohibition for claiming a higher depreciation in certain circumstances but as already stated, it has to be justified by way of evaluation of different factors and a note is also to be given towards such justification. In the case of the appellant, it was not so and on the contrary the depreciation was claimed at higher rates in contravention of Schedule XIV of the Indian Companies Act and that too without there being any justification by way of any evaluation etc. Taking into consideration all these facts as also the provisions of Sections 205, 315, Schedule XIV of the Indian Companies Act, it appears that the computation of book profit so made under Section 115J is by all means on a correct footing and accordingly the levy of tax with reference to book profit vis a vis the provisions of Section 115J, being in order, deserves to be confirmed. It may also be stated that the auditors note is not. in categorical terms but is only qualified with reference to the correctness of the preparation of details with a rider that depreciation has been claimed us per Income-tax Rules. This is no justification at all as required under the provisions of Companies Act, for deviating from Schedule XIV. Hence, the plea of the appellant in regard to the inapplicability of provisions of Section 115.1, being untenable, is rejected.
18. Now, the assessee is in appeal before us.
19. It was submitted by the ld. A.R. that the provisions of Section 115J arc not applicable in this case. The said provisions are special provisions relating to certain fiction created by the statute for the purpose of taxation with reference to book profit. The fiction so created by the statute is to be correctly interpreted and when there is no taxable profit or profit is less than 30 per cent of the book profit, the provisions of Section 115J arc not applicable. The Sub-section (1 A) of Section 115J provides the company to prepare the Profit & Loss Account in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. As per Explanation to Sub-section (1 A) of Section 115J, book profit means, the net profit as shown in the Profit & Loss Account and it provides for certain adjustments to arrive at the book profit for the purpose of Section 115J. The assessee company is a Public Limited Company and while preparing the Profit & Loss Account, it debited the depreciation by taking into consideration the different factors as per Auditors' opinion. However, the depreciation as per Income-lax Rules was claimed. Reference was also made to Part II to Schedule VI of the Companies Act. It was also stated that if no provision is made for depreciation, this has to be stated and the quantum of arrears of depreciation computed in accordance with Section 205(2) of the Companies Act will also be disclosed by way of a Note in the Auditors' Report. It is further stated that the only requirement is for providing depreciation and if no provision is made, a Note is to be given. It was further submitted that while giving the Note for non-provision of depreciation, the calculation is to be made as provided in Section 205 of the Companies Act. In view of this, it is not mandatory on the company to provide such depreciation and it also docs not provide the rate at which the depreciation is to be provided for. If no depreciation claim is shown by way of a Note, only then it can be said that the accounts have not been drawn in accordance with the requirements of Part II of Schedule VI of the Companies Act. The provisions of Section 205 of the Companies Act, are in relation to declaration of dividend and managerial remuneration and not with reference to preparation of Profit & Loss A/c. Hence, the providing of depreciation is not the requirement of Part II of Schedule VI of the Companies Act. It was also submitted that the assessee company can charge high rate of depreciation or even low rate of depreciation. But in this case the Company has provided for depreciation on the WD V as per rates provided under Income-tax Rules. In support of his argument, the ld. A.R. relied upon the following decisions :
1. Asstt. CIT v. Bell Ceramics Ltd. [1999] 69 ITD 156 (Ahd.)
2. CIT v. Punjab Concast Steel Ltd. [1995] 81 Taxman 456 (Punj. & liar.)
3. Asstt. CIT v. Juicy Beverages (P.) Ltd. [1998] 97 Taxman 192 (Chd.)
4. Modern Woollens Ltd. v. Dy. CIT [1993] 47 ITD 154 (Born.) and
5. IT AT Chandigarh Bench order under Section 256(1) in RA No. 106 (Chd.)/97 arising out of ITA No. 1344/CHD/98 assessment year 1990-91 dated 9-7-1997 in the case of CIT v. Paul Woollen Mills (P.) Ltd.
20. The ld. A.R. also cited some other cases reported in Taxman & TTJ and has promised to file copies of all the decisions cited in Taxman & TTJ but did not file the same so far.
21. On the other hand, the ld. DR, while strongly relying upon the orders of the authorities below, submits that the calculation made by the Assessing Officer for charging of tax equivalent to 30 per cent of such book profit is in accordance with the provisions of Section 115J, read with Section 205 of the Companies Act and hence the order passed by the Assessing Officer, which was confirmed by the CIT(A) also, should be upheld. He also refers the Commentary of learned Author Chaturvedi & Pilhisaria's Fifth Edition, at pages 4173-74 in support of his arguments.
22. We have heard the rival submissions, perused the record and gone through the relevant records, to which our attention was drawn and also looked into the case laws cited by the parties. We find that this controversy has now been settled by the Hon'ble Supreme Court of India in the case of Surana Steels (P.) Ltd. v. Dy. CIT [1999] 237 ITR 777', wherein the Apex Court has observed as follows (page 786):
We are of the opinion that the term 'loss' us occurring in Clause (b) of the proviso to Section 205(1) of the Companies Act has to be understood and read as the amount, arrived at after taking into account the depreciation, Then alone the formula prescribed in this clause would make sense and it would be consistent with the object sought to be achieved by enacting Section 115J of the Income-tax Act, 1961. If 'loss' were to be taken as pre-depreciation loss then the resultant computation will not be in conformity with the tenor of the provisions of Section 205, The language of Clause (b) of the proviso to Section 205(1) is clear. It applies to those cases where the depreciation has been provided in accordance with the provisions of Sub-section (1) of Section 205. The depreciation is provided for in the profit and loss account. The loss is arrived at after taking into account the depreciation provided. It is therefore clear that the word 'loss' as used in the proviso, Clause (b) to Section 205(1) signifies the amount arrived at after taking into account the amount of depreciation and it has to be so read and understood in the context of Section 115J of the Income-tax Act, 1961. We do not agree with the view taken by the High Court 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 view taken by the High Court would partially defeat the object sought: to be achieved by Section 115J of the Income-tax Act, 1961. We also do not agree with the High Court saying that having lifted Section 205(1), proviso, Clause (b), from the Companies Act into' Section 115J of the Income-tax Act, there is no occasion to refer to the Companies Act, 1956 at all.
23. In the case of CIT v. Mech Technik India (P.) Ltd. [2000] 245 ITR 60', the Hon'ble Gauhati High Court has considered the identical issue. There was a following question of law before the High Court :
Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in allowing depreciation as per rate applicable in income-tax while computing the assessee's income under Section 115J of the Income-tax Act, 1961.
The above question was answered in favour of the revenue in view of the decision of Hon'ble Supreme Court of India in the case of Surana Steels (P.) Ltd. (supra).
24. Respectfully following the judgments of the Apex Court and the Hon'ble Gauhati High Court, we confirm the order passed by the CIT(A) on this account also.
25. During the course of arguments, the ld. A/R has taken an alternative plea that triple shift allowance should be allowed to the assessee.
26. After carefully considering the rival submissions of the parties and perusing the material on record, we find that no such claim was made by (he assessee before the Assessing Officer or before the CIT(A) and no material was placed before us to show that the assessee is entitled for such claim. Therefore, in the absence of any prayer for the admission of such additional ground as per Income-tax (Appellate Tribunal) Rules, 1963, we do not find any merit in the alternative plea raised by the ld. A/R at this stage and hence it is rejected.
27. The last ground, which is an Additional Ground, is with regard to the charging of interest under Sections 234B and 234C of the Income-tax Act.
28. The ld. A/R submits that since the entire exercise of computing the income or that of book profit could be made only at the end of the financial year, the advance tax provision cannot be made applicable unless and until accounts are audited and the Balance Sheet is prepared because till then the assessee may not know whether the provisions of Section 115J would be applicable or not. The liability would be after the book profits are determined in accordance with the Companies Act. Hence, there was no default on the part of the assessee so far as the provisions of advaxnce tax are concerned, and, therefore, interest cannot be charged under Sections 234B and 234C. In support of his argument, the ld. A/R strongly relied upon the judgment of Hon'ble Karnataka High Court in the case of Kwality Biscuits Ltd. (supra).
29. On the other hand, the ld. D/R supported the orders of the authorities below as charging of interest is consequential and as per the scheme of the Act.
30. We have carefully considered the rival submissions of the parties and we find that the Hon'ble Karnataka High Court in the case of Kwality Biscuits Ltd. (supra), has held as under (page 527):
Since the entire exercise of computing the income or that of book profit could be only at the end of the financial year, the provisions of Sections 207, 208, 210 or 210 cannot be made applicable, until and unless the accounts are audited and the balance-sheet is prepared even the assessee may not know whether the provision of Section 115J would be applicable or not. The liability would be after the book profits arc determined in accordance with the Companies Act. The words 'for the purposes of this section' in the Explanation to Section 115J(1A) are relevant and cannot be construed to extend beyond the computation of liability of tax. Accordingly, we arc of the view that the Income-tax Appellate Tribunal was not justified in directing to charge interest under Sections 234B and 234C of the Income-tax Act.
Whereas the Hon'ble Gauhati High Court in the case of Assam Bengal Carriers Ltd. v. CIT [1999] 239 ITR 862, has held as under (Head Notes):
Company has to pay advance tax even where it is liable to pay lax under Section 115J and, therefore, interest under Sections 234B and 234C is also leviable, in such case.
However, in view of the decision of the Hon'ble Supreme Court in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192, wherein it was held that:
If the court finds that the language of a taxing provision is ambiguous or capable of more meanings than one, then the court has to adopt that interpretation which favours the assessee, more particularly so where the provision relates to the imposition of a penalty.
31. We, therefore, respectfully following the decision of Hon'ble Karnataka High Court in the case of Kwality Biscuits Ltd. (supra), are of the opinion that the interest under Sections 234B and 234C are not chargeable.
32. In the result, the appeal filed by the assessee is partly allowed.
B.R. Jain, Accountant Member
1. After much persuasion, I have not been able to agree with the view taken by my brother ld. Judicial Member in respect of grounds 2(a) and 2(b) of the assessee's appeal which are dealt within paras 15 to 24 of his order. Briefly the facts are that the assessee prepared its profit and loss account for the relevant previous year in accordance with the provisions of parts II and III of Schedule VI of the Companies Act, 1956. After providing depreciation of Rs. 72,23,897 for the current year which was equal to the rates as prescribed under the I.T. Rules, it determined the net loss of Rs. 1,11,559. The Assessing Officer while completing the assessment determined the total income first at a loss of Rs. 95,754 and thereafter recasted its profit and loss account so as to work out the book profit under Section 115 J of the Income-tax Act, 1961 by restricting the claim of depreciation of Rs. 72,28,897 to Rs. 27,68,990. He concluded that the assessee has charged excess depreciation in the profit and loss account in contravention of Sch. XIV of the Companies Act, 1956 by Rs. 44,59,907. This was done by calculating depreciation at the rates provided under Sch. XIV of the Companies Act. Thus the book profit for the purpose of Section 115 J of the Income-tax Act has been worked out at Rs. 43,48,348, 30% of the book profits so arrived at has been treated as income liable to tax for the year under appeal. The assessee challenged this action of the Assessing Officer before CIT(A) and pleaded before him that the only requirement of the Companies Act is for providing of depreciation but there is no requirement about the rate at which the depreciation for the current year has to be provided for preparing its profit and loss account as per parts II and III of the Companies Act. His contention that the Assessing Officer has erred in recasting the profit and loss account by providing depreciation as per Schedule XIV was not allowed by the CIT(A). It has however been observed by him that under the provisions of the Companies Act, higher rate of depreciation can be claimed by making bona fide technical evaluation, but as the claim of depreciation at higher rate is not supported by any bona fide technical evaluation, as such, the reference made by the appellant to the Circular issued by the Company Law Board as also guidelines of the Institute of Chartered Accountants of India were not held to be applicable in the assessee's case. The action of the Assessing Officer was confirmed by him. Before us also the assessee's counsel has pleaded that no bar has been placed in the provisions of Parts II and III of Sch. VI of the Companies Act with regard to charge of higher depreciation nor that depreciation has to be charged as per provisions of Section 205(1)(b) of the Companies Act for preparing profit and loss account for the current year. The assessee has worked on tripple shift basis, but it charged depreciation equal to the rates at which it is permissible under the Income-tax Act, 1961. It has also been pleaded that such a rate stands duly approved by the Board of Directors of the Company by way of approval of annual accounts, who are not less than experts in respect of the matters and affairs of their company. The claim of the assessee is that the provisions of Section 205(1 )(&) of the Companies Act, 1956 read with Section 350 of that Act which refers to the rates given in the Sch. XIV of the Companies Act are not applicable in preparation of profit and loss account for the relevant previous year. The provisions of Section 205(1)(b) of the Companies Act are relevant only in respect of Clause (iv) under the Explanation to Section 115J of Income-tax Act for arriving at the book profits after making adjustments and only when the loss/losses of earlier years are to be set off against the profits of the relevant previous year, whereas my ld. brother in para 24 of his order confirms the order passed by the CIT(A) by following the judgment of the Apex Court in the ease of Surana Steels P. Ltd. (supra) and of the Hon'ble Gauhati High Court in the case of Mech. Technik India (P.) Ltd. (supra). However, I am unable to agree with him.
2. I have carefully gone through the judgment passed by the Apex Court in the case of Surana Steels (P.) Ltd. (supra) as well as Mech. Technik India (P.) Ltd. 's case (supra) who have followed the said decision of the Apex Court. The question which fell for consideration of the Hon'ble Gauhati High Court related to setting off of the amount of loss against the profit after taking into account the amount of depreciation as per rate applicable in income-tax and not for the purpose of preparation of profit and loss account for the relevant previous year. The question before the Apex Court in the case of Surana Steels (P.) Ltd. (supra) was decided in the context of the interpretation of the word "Loss" as used in the proviso Clause (b) of Section 205(1) in relation to clause IV of the Explanation to Section 115 J of Income-tax Act, 1961. While interpreting it the Apex Court has laid down two important principles as under :-
1. The word 'loss' as used in the proviso Clause (b) to Section 205(1) signifies the amount arrived at after taking into account the amount of depreciation.
2. The provisions must be construed in the sense it bore in statute from which it was taken.
3. In Surana Steels (P.) Ltd. 's case (supra) the Apex Court did not deal with the situation as to the rate at which depreciation has to be provided for preparation of profit and loss account for the relevant previous year. It also did not give an omnibus direction to all types of companies be it a public limited company or a private limited company to conform to the provisions of Section 205(1)(b) of the Companies Act and universally apply same rate of depreciation for all types of companies uniformity nor did it say about charging of depreciation for the current year, for which profit and loss account has to be prepared as per parts II arid III of Schedule VI of the Companies Act, 1956. It is, therefore, essential to resort to the judgment of the Apex Court to the context in which the decision has been rendered. It is settled position of law that every thing said in a decision does not constitute a precedent - a decision has to be considered in the context in which it was rendered. The authority on this is found at para 43 of the decision of the Hon'ble Supreme Court in the case of State of Punjab v. Baldev Singh [1999] 6 SCC 172 (Bench comprising of five Hon'ble Judges). As referred earlier that the important principle which has been laid down by the Apex Court in the case of Surana Steels (P.) Ltd. (supra) is that the provision must be construed in the sense it bore in a statute from which it was taken and respectfully following this principle, I find that the plain reading of the provision of Section 205 of the Companies Act requires the past loss or unabsorbed depreciation, whichever is less, to be set off against the book profits of the current year for determining profit for the purpose of declaring dividend. When construed, Clause (iv) of the Explanation to Section 115J of the Income-tax Act, the same adjustment in computation of book profits for the purpose of levy of minimum tax have been made applicable where loss or amount of depreciation which is required to be set off against the profits of the relevant previous year and not that for determination of the profit of the relevant previous year. In other words, it is for the purpose of set off of the loss or depreciation alone that the proviso (b) of Section 205(1) has been made applicable under Section 115J of the Income-tax Act and not for the purpose of preparation of profit & loss account as per parts II & III of Sch. VI of the Companies Act, 1956 nor any other purpose. This being so, interpretation of the word loss by the Apex Court, with due regard, cannot be understood to mean and apply for the purpose of preparation of profit and loss account also for the relevant previous year. This did not give any authority to the Assessing Officer to recast the profit and loss account for the relevant previous year and reduce the amount of depreciation so charged by the appellant, which the Companies Act itself did not require or permit. In view of this aspect of the matter, the CIT(A) is found to have erred in confirming the recasting of profit and loss account by the Assessing Officer by way of substituting the depreciation as per Seh. XIV of the Companies Act, 1956 in place of higher depreciation charged by the assessee in the profit and loss account prepared as per provisions of parts II and III of the Sch. VI of the Companies Act, 1956. The claim of the assessee is thus found to be in conformity with the requirement of the law. The authorities below were not justified in preparing the profit and loss account of the relevant previous year by allowing a different rate of depreciation as per Sch. XIV of the Companies Act, 1956 so as to arrive at. a figure of profit of Rs. 43,48,348 which in fact was a loss of Rs. 1,31,559 and which required no further adjustment as the appellant was not seeking any set off of loss or depreciation against the profit of the relevant previous year in terms of Clause (iv) of Explanation to Section 115J of the Income-tax Act, 1961. There being no book profits, the income of the appellant was not liable to be taxed.
4. In the result, the ground raised by the assessee is directed to be allowed. REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 As there is a difference of opinion between the Members in one issue of the present appeal, the same is required to be resolved by one or more Members of the Tribunal as nominated by the Hon'ble President, ITAT in terms of Section 255(4) of the Act. Accordingly, the following questions of difference are referred :-
1. Whether in the facts and circumstances of the case, the issue of allowing depreciation as per rate applicable in income-tax while computing the assessee's income under Section 115J of the Income-tax Act is settled issue by the decision of the Hon'ble Supreme Court of India in the case of Surana Steels Pvt. Ltd. v. DCIT [1999] 237 ITR 777 and Gauhati High Court in the case of CIT v. Mech. Tcchnik India (P.) Lid. [2000] 245 ITR 60.
2. Whether on the facts and in law the Assessing Officer could have recasted the profit and loss account prepared as per parts II and III of Schedule VI of the Companies Act by reducing the depreciation charged by way of applying proviso Clause (b) of Section 205(1) of the Companies Act, 1956 and whether the issue could be said to be identical and covered by the decision of the Apex Court in the case of Surana Steels (P.) Ltd. v. DCIT[1999] 237 ITR 777 and Gauhati High Court in the case of CIT v. Mech. Technik India (P.) Ltd. [2000] 245 ITR 60.
2. We direct the registry to place the matter before the Hon'ble President, ITAT.
THIRD MEMBER ORDER Vimal Gandhi, President
1. On account of difference of opinion between Hon'ble Members of ITAT, Jaipur Bench, this case has come up before me under Section 255(4) of Income-tax Act. The ld. Members have referred the difference between them as per the following questions :
1. Whether in the facts and circumstances of the case, the issue of allowing depreciation as per rate applicable in income-lax while computing the assessee's income under Section 115J of the Income-tax Act is settled issue by the decision of the Hon'ble Supreme Court of India in the case of Surana Steels (P.) Ltd. v. DCIT & Ors. [1999] 237 ITR 777 and Gauhati High Court in the case of CIT v. Mech. Technik India (P.) Ltd. [2000] 245 ITR 60.
2. Whether on the facts and in law the Assessing Officer could have recasted the profit and loss account prepared as per parts II and III of Schedule VI of the Companies Act by reducing the depreciation charged by way of applying proviso Clause (b) of Section 205(1) of the Companies Act, 1956 and whether the issue could be said to be identical and covered by decision of the Apex Court in the case of Sumna Steels (P.) Ltd. v. DCIT[4999] 237 ITR 777 and Gauhati High Court in the case of CIT v. Mech. Technik India (P.) Ltd. [2000] 245 ITR 60.
2. The facts of the case arc recorded by the ld. Members in their respective proposed orders in detail and need not be repeated here. I would briefly refer to them as arc necessary for disposing of this difference between the two Members. The assessee-company, for purposes of computing "book profit" under Section 115J of the Income-tax Act, had provided depreciation of Rs. 72,23,897 which was equal to the amount it was entitled under, the Income-tax Rules. If above provision was taken into account, the net loss of assessee came to Rs. 1,11,559. The Assessing Officer had determined assessee's loss at Rs. 95,754 and thereafter recasted assessee's profit and loss account and restricted the claim of depreciation to Rs. 27,68,990. He worked out book profit at Rs. 43,48,348 and held that 3096 of above was to be charged under Section 115J of the Income-tax Act. The Assessing Officer allegedly computed depreciation as provided in Parts II and III of Schedule VI of the Companies Act, 1956.
3. The assessee impugned above action of the Assessing Officer before Commissioner of Income-tax (Appeals) and submitted that depreciation was provided by the assessee as per the Company Law. As no rate of depreciation was provided under the above Act, the assessee provided depreciation as per Income-tax Rules and prepared the profit and loss account as per Parts II and III of Schedule VI of the Companies Act. The Assessing Officer has wrongly recasted profit and loss account by providing depreciation as per Schedule XIV, which has no application to the present case.
4. The ld. Commissioner of Income-tax (Appeals) did not find much force in the contention advanced on behalf of assessee. He held that under the provision of the Company Law, higher rate of depreciation could be claimed only by making bona fide technical evaluation of the machinery but in the present case, no such bona fide technical evaluation was available. The Circular of Company Law Board relied upon by the assessee had no application in this case. Accordingly, action of the Assessing Officer was confirmed by the Commissioner of Income-tax (Appeals).
5. The assessee then carried the matter in further appeal to the Appellate Tribunal. After hearing both the parties and after considering relevant case laws, the ld. Judicial Member, in his proposed order, held that the assessee, in order to avoid tax under Section 115J of the Income-tax Act, had shown book profit at nil. The depreciation was not provided as per Parts II and III of Schedule VI to the Companies Act. A much higher amount was provided and, therefore,. Assessing Officer was justified in recasting profit and loss account and in allowing depreciation under Section 205 of the Companies Act. The ld. Judicial Member further held that controversy and dispute here stood settled by the decision of Hon'ble Supreme Court in the case of Surana Steels (P.) Ltd. (supra). A portion of above decision has been reproduced at pages 10 and 11 in the order of the ld. Judicial Member. The ld. Judicial Member further supported his view by referring to another decision of Hon'ble Gauhati High Court in the case of Mech. Technik India (P.) Ltd. (supra). He, accordingly, held that matter stood finally concluded against the assessee and depreciation by revenue authorities was rightly computed under the Companies Act for computing book profit under Section 115J of Income-tax Act. The ld. Judicial Member also rejected the claim of the assessee that triple shift allowance was wrongly not allowed while computing book profit. The ld. Judicial Member held that no such claim was made by the assessee before Assessing Officer or Commissioner of Income-tax (Appeals) and, therefore, such a claim was not tenable.
6. The ld. Accountant Member did not agree with the proposed order of the ld. Judicial Member. He noted the contention advanced on behalf of the assessee that depreciation was provided as per Parts II and III of Schedule VI of the Companies Act, which placed no bar to charge of higher depreciation, nor depreciation was required to be charged under provision of Section 205 of Companies Act for preparing profit and loss account for the current year. The books of account prepared by the assessee were duly approved by the Board of Directors of the Company while approving annual accounts. The ld. Accountant Member further noted the arguments of the assessee that provisions of Section 205(1 )(b) of the Companies Act are relevant only in respect of Clause (iv) under the Explanation to Section 115J of the Income-tax Act and only where losses of earlier years are to be set off against the profits of the relevant previous year.
6.1 In the proposed order, the ld. Accountant Member held that decision in case of Surana Steels (P.) Ltd. (supra) as well as Mech. Technik India (P.) Ltd. 's case (supra) the question which fell for consideration related to setting off of amount of loss against the profit after taking into account the amount of depreciation as per rate applicable under income-tax and not for preparation of profit and loss account for the relevant previous year. Further in the case of Surana Steels (P.) Ltd. (supra). Their Lordships of Supreme Court decided the question whether the term "Loss" as used in Clause IV of Explanation to Section 115J would include "depreciation". Their Lordships were not dealing with question of rate of depreciation to be provided for preparing profit and loss account for the relevant period. Their Lordships did not hold that in every case of determination of book profit, provision of Section 205(1)(b) of Companies Act was to be universally applied. In other words, the ld. Accountant Member further observed in his order that it was for the purpose of set off of the loss or depreciation alone that the proviso (b) of Section 205(1) has been made applicable under Section 115J of the Income-tax Act. The above provision has no application for preparing profit and loss account as per Parts II & III of Schedule VI of the Companies Act. The ld. Accountant Member, accordingly, held that assessing authority had no role to recast the profit and loss account for the relevant previous year and reduce the amount of depreciation so charged by the assessee. Such an action was not even justified or permitted under the Companies Act. The assessee was fully justified in claiming higher rate of depreciation in profit and loss account prepared and fully satisfied the requirement of Parts II and III of Schedule VI of the Companies Act, 1956. The ld. Accountant Member accordingly held that assessee had no book profit for purposes of Section 115J of the Income-tax Act. He allowed the appeal of the assessee.
7. The difference between the ld. Members has been referred to me in the abovementioned background. I have heard both the parties. The ld. counsel for the assessee relied upon the order of the ld. Accountant Member. He pointed out that it was first year of business of the assessee. The provision of Parts II and III of Schedule VI of the Companies Act was relevant if no amount of depreciation was provided. The assessee was obliged to show the method adopted for making provision as aforesaid. However, no rate of depreciation was provided in Parts II and III of Schedule VI of the Companies Act. Provision of Section 205 of Companies Act, which Assessing Officer sought to invoke in the present case, had no application. The decision in the case of Surana Steels (P.) Ltd. (supra), was also misconducted by the ld. Judicial Member. The ld. counsel further submitted that Balance Sheet and Profit & Loss Account adopted by assessee for purposes of Section 115J of Income-tax Act stood approved by Board and also at the General Meeting. There is no further dispute that these were filed with authorities under the Company Law. The Assessing Officer had no authority to interfere with books of account prepared by the assessee. The controversy stood settled as per the decision of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT[2002] 255 ITR 273'. He, accordingly, prayed that proposed order of the ld. Accountant Member should be upheld.
8. The ld. Departmental Representative, Shri Meena, on the other hand, supported the proposed order of the ld. Judicial Member. He tried to distinguish the decision of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. (supra), by stating that that case related to claim of arrears of depreciation and not to current depreciation. Further, the Court did not deal with the question whether assessee could claim depreciation as per Income-tax Rules where accounts are prepared under Parts II and III of Schedule VI of the Companies Act. A higher rate of depreciation could be claimed if technical evaluation report was submitted by the assessee. However, in the present case, no technical evaluation report was available. The ld. Departmental Representative, accordingly, justified the action of the revenue authorities supported in the proposed order of the ld. Judicial Member. The ld. Departmental Representative further submitted that the view taken was fully supported by the following authorities :
(1) Surana Steels (P.) Ltd.'s case (supra) (2) CIT v. Dynamic Orthopedics (P.) Ltd. [2002] 257 ITR 446' (Ker.) (3) Dy. CIT v. Vardhman Fabrics (P.) Ltd. [2002] 254 ITR 4312 (Guj.).
9. I have given careful thought to the rival submissions of the parties. The question involved in the present case, in my opinion, is fully covered in favour of the assessee as per decision of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. (supra). Their Lordships, while considering a similar question relating to provision of depreciation in the accounts prepared as per provisions of Parts II and III of Schedule VI of the Companies Act for purposes of Section 115J of the Income-tax Act, observed as per Head-note as under :
The Assessing Officer, while computing the book profits of a company under Section 115J of the Income-tax Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer, thereafter, has the limited power of making increases and reductions as provided for in the Explanation to Section 115J. The Assessing Officer does not have the jurisdiction to go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation. The use of the words "in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act" in Section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinized and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-section (1A) of Section 115J does not empower the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company.
Held accordingly, that, while determining the "book profits" under Section 115J, the Assessing Officer could not recompute the profits in the profit and loss account by excluding provisions made for arrears of depreciation.
Decision of the Kerala High Court in CIT v. Apollo Tyres Ltd. [1999] 237 ITR 706 reversed on this point.
9.1 As noted above, Their Lordships have clearly held that Assessing Officer has very limited power of tinkering (increasing or reducing) as provided for in the Explanation to Section 115J of the Income-tax Act. The Assessing Officer has to accept the authenticity of accounts with reference to provisions of the Companies Act which obliges the assessee to maintain its account in a manner provided by that Act. The authenticity is required to be satisfied by the statutory auditors and approved by Company in General Meeting and by Registrar of Companies.
10. In the present case, the ld. Accountant Member has specifically noted that accounts prepared by the assessee were approved by the Board of Directors. Further, no challenge was raised before me that these accounts were not approved in General Meeting and not filed before Registrar of Companies. The claim of counsel for the assessee was not controverted or challenged by the opposite side. The matter, therefore, has to be taken as fully covered in favour of the assessee as per the decision in the case of Apollo Tyres Ltd. (supra).
11. The aforesaid decision is on all force whereas the decision of Apex Court in the case of Surana Steels (P.) Ltd. (supra), is distinguishable. In that case, Their Lordships were dealing with question whether term "Loss" used in the relevant provision would cover depreciation also. Their Lordships were not dealing with question as to at what rate the depreciation should be provided to the assessee for purposes of Section 115J of Income-tax Act. In the light of direct decision of Hon'ble Supreme Court, I deem it unnecessary to deal with further case cited on behalf of the revenue. I see no distinguishing feature between this case and the one decided by Their Lordships of the Supreme Court but hold that the case of Apollo Tyres Ltd. (supra) is applicable to the case in hand.
12. In the light of above discussion, I agree with the view taken by the ld. Accountant Member. The assessee has rightly shown that it had no book profit for purposes of Section 115J of Income-tax Act.
13. The matter be now placed before the regular Bench for disposal of appeal.
Satish Chandra, Judicial Member
1. There was a difference of opinion between the Members of the Bench and the following questions were referred to the Third Member for his opinion :
1. "Whether in the facts and circumstances of the case, the issue of: allowing depreciation as per rate applicable in income-tax while computing the assessee's income under Section 115J of the Income-tax Act is settled issue by the decision of the Hon'ble Supreme Court of India in the case of Surana Steels (P.) Ltd. v. DCIT[1999] 237 ITR 777 and Gauhati High Court in the case of CIT v. .Meek Technik India (P.) Ltd. [2000] 245 ITR 60.
2. Whether on the facts and in law the Assessing Officer could have recasted the profit and loss account prepared as per parts II and III of Schedule VI of the Companies Act by reducing the depreciation charged by way of applying proviso Clause (b) of Section 205(1) of the Companies Act, 1956 and whether the issue could be said to be identical and covered by the decision of the Apex Court in the case of Surana Steels (P.) Ltd. v. DCIT [1999] 237 ITR 777 and Gauhati High Court in the case of CIT v. Mech. Technik India (P.) Ltd. [2000] 245 ITR 60.
2. The Hon'ble President, Shri Vimal Gandhi, sitting as Third Member, by his order dated 13th September, 2004, has concurred with the view of the ld. Accountant Member, who has rightly shown that it had no profit for purposes of Section 115J of the Income-tax Act.
3. Therefore, in accordance with the majority view, the issue is decided in favour of the assessee and the appeal of the assessee is allowed.