Income Tax Appellate Tribunal - Kolkata
Nippon Denro Ispat Ltd. vs Deputy Commissioner Of Income-Tax on 20 January, 1998
Equivalent citations: [1998]67ITD205(KOL)
ORDER
D. Manmohan, JM
1. This appeal is directed against the order of the Commissioner (Appeals) - 1, Calcutta.
2. Though the assessee-company raised 11 grounds, only one issue was contested before us, i.e., with regard to the quantum of depreciation to be taken into consideration for the purpose of arriving at the 'book profit', as per section 115J of the Act.
3. We are concerned with the assessment year 1989-90. This being a transitional previous year, accounting year of the assessee commences on 1-11-1987 and ends on 31-3-1989. For the purpose of declaration of dividend, under the Companies Act, assessee followed straight line method and depreciation was provided in the books accordingly. The effective dispute in the instant case would be with regard to the method followed by the assessee in respect of the period falling after 2-4-1987, inasmuch as, depreciation rate under the Companies Act under straight line method is 5.15% and under w.d.v. it is 15% whereas, under the I.T. Act, it is 33.33% under w.d.v. method. Though the assessee showed in its books depreciation as per straight line method, for the purpose of computing the 'book profit' as per section 115J of the Act, the company adopted w.d.v. method and the depreciation was worked out as provided for under the I.T. Act, i.e., at 33.33%. Thus higher rate of depreciation was claimed resulting in no taxable income as per section 115J of the Act.
4. Assessing Officer observed that the assessee is not entitled to maintain two sets of accounts, i.e., one for the Company law purpose and the other for I.T. purpose. He observed that even for the purpose of I.T. Return, the accounts have to be prepared in accordance with the Companies Act and hence, the rate and method adopted for the purpose of declaring dividends cannot be deviated for the limited purpose of computing the book profit under section 115J of the Act. He has gone further to observe that the company having worked out the depreciation as per straight line method, any excess depreciation claimed by following the different method would be of the character of reserve which need be added to the profit as per Part III of Schedule VI of the Companies Act. He, therefore, did not accept the method followed by the assessee.
5. Aggrieved, assessee contended before the first appellate authority that under section 350 of the Companies Act, the assessee-company has no option but to follow only w.d.v. method whereas, under section 205 of the Companies Act, the assessee has the option to follow either straight line or w.d.v. method and thus choosing the option for I.T. purpose is not contrary to law. However, Commissioner (Appeals) did not accept the submissions of the assessee. He observed that the provisions of I.T. Act are expressly made alien to the provision of section 115J and hence, the word "profit" in sub-clause (iv) would mean only the profit as computed by the assessee-company in its books of account and not the computed profit in accordance with the provisions of Income-tax Act, 1961. He further observed that undersection 205 of the Companies Act, the assessee having followed a particular method of declaring dividend, the assessee could not opt for any other method for I.T. purpose and in this regard he stressed the words "arrived at" appearing at several places of sub-section (1) of section 205 to draw inference that no such option is available to the assessee. He, therefore, confirmed the action of the Assessing Officer in this regard.
6. Further aggrieved, assessee is in appeal before us. Ld. counsel for the assessee contended that under section 115J(1A), the assessee is entitled, for the purpose of this section, to prepare its Profit and Loss A/c. for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act, 1956 and the language used in the sub-section makes it amply clear that the assessee is not bound by the method followed while computing the profit for the purpose of declaring dividend. Adverting our attention to section 115JA of the Act (inserted by the Finance (No. 2) Act, 1996, w.e.f. 1-4-1997, ld. counsel submitted that the claim of taxing zero tax company was re-introduced by employing the same language but with a difference, inasmuch as, provision of section 115JA(2) makes it abundantly clear that while computing the 'book profit', as per section 115JA, depreciation shall be calculated on the same method and rates which have been adopted for calculating depreciation for the purpose of preparing the profit and loss account laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, whereas, such proviso is absent in section 115J of the Act. This makes the intention of the Legislature very clear that depreciation need not be calculated on the same method while computing the 'book profit' as per section 115J(1A) of the Act. Ld. counsel also adverted our attention to sections 350 and 205 of the Companies Act to highlight that under section 205, the assessee is given an option to adopt straight line method or w.d.v. method though under section 350 of the Companies Act, only w.d.v. method is prescribed. He has also furnished before us the P. & L. A/c. copies in respect of the subsequent assessment years to show that this method was consistently followed by the assessee-company for I.T. purpose. He further relied upon the decision of the Bombay Bench of the Tribunal in the case of Modern Woollens Ltd. v. Dy. CIT [1993] 47 ITD 154 in support of his contention that the assessee has discretion to provide higher rates of depreciation than those laid down in Schedule XIV of the Companies Act, for the purpose of working out the 'book profit' under section 115J of the Act.
7. On the other hand, ld. departmental representative submitted that the issue is squarely covered by the decision of the Pune Bench of the Tribunal in the case of Sudarshan Chemical Industries Ltd. v. Dy. CIT [1997] 60 ITD 629. Ld. departmental representative further submitted that the assessee is not entitled to choose a different method for the limited purpose of working out the 'book profit' under section 115J(1A) of the Act. Thus he supported the orders of the tax authorities.
8. We have carefully considered the rival submissions and perused the record. The issue is more or less confined to the interpretation of the provisions of section 115J and the relevant provisions of the Companies Act. In the case of Modern Woollens Ltd. (supra), the Bombay Bench of the Tribunal considered the question as to whether the assessee is entitled to calculate the depreciation at a rate different from that laid down in Schedule XIV of the Companies Act. The Bombay Bench of the Tribunal exhaustively considered the relevant provisions in arriving at a conclusion that depreciation can be computed by the assessee as per the I.T. Rules as long as it is in accordance with the procedure prescribed in Parts II and III of Schedule VI to the Companies Act. However, Pune Bench of the Tribunal in the case of Sudarshan Chemical Industries Ltd. (supra) was of the opinion that the assessee cannot adopt a different method of computing the depreciation for the I.T. purpose and he is duty bound to adopt the 'book profit' as arrived at by the assessee in the P. & L. A/c. prepared for corporate accounting. Pune Bench, in this regard, observed that Explanation to sub-section (1A) to section 115J used the words "profits as shown in the P&L a/c for the relevant previous year" and the word "prepared" in sub-section (IA) has to be read conjointly with the aforementioned words and the obvious conclusion that could be arrived at from a reading of the same is that whatever method is followed by the assessee for corporate accounting, the same profit, as arrived at in the P&L A/c., should be taken into consideration for the purpose of section 115J of the Act.
9. As the two Benches of the Tribunal have taken two divergent opinions on this issue, it is necessary for us to have a fresh look on the issue so as to see as to which interpretation is the most reasonable interpretation in the facts and circumstances of the case.
10. Prior to insertion of sub-section (1A) of section 115J the Explanation to section 115J(1) used the words "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". By the Finance Act, 1989 w.e.f. 1-4-1989, sub-section (1A) was inserted which reads as under :
"Every assessee, being a company, shall, for the purposes of this section, 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."
Consequently, the words "prepared ... Companies Act, 1956" were substituted by the words "prepared under sub-section (1A)". Thus, for the assessment year 1989-90, an assessee, in order to arrive at the 'book profit', has to prepare 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. The words used in sub-section (1A) "for the purposes of this section, prepare its profit and loss account ...." indicate that for the limited purpose of arriving at the 'book profit' under section 115J, the assessee has to prepare the profit and loss account in accordance with the provisions of Parts II and III of Schedule VI. Explanation to sub-section (1A) defines 'book profit' as the net profit as shown in the profit and loss account prepared under sub-section (1A). A conjoint reading of sub-section (1A) and the Explanation shows that (a) assessee is entitled to prepare its profit and loss account in accordance with provisions of Parts II and III of Schedule VI; (b) preparation of the profit and loss account can be for the purpose of section 115J only; and (c) net profit as shown in the said profit and loss account, prepared under sub-section (1A), will be taken as the 'book profit'.
11. From the above it is to be seen that section 115J nowhere provides that net profit as shown in the profit and loss account for corporate accounting purpose should be adopted. The meaning of word 'prepared' and the words 'as shown in the profit and loss account' cannot be stretched to infer that the assessee cannot prepare its profit and loss account afresh for the purpose of this section and cannot deviate from the method followed for corporate accounting. It is further interesting to note that section 115J has become in-operative from the assessment year 1992-93 and onwards in view of the fact that this special provision is applicable only where the total income in respect of the previous year falling before the 1st day of April, 1991, is less than 30% of its 'book profit'. However, the Legislature felt the need to reintroduce the provision. By the Finance (No. 2) Act, 1996, w.e.f. 1-4-1997, section 115JA was introduced to achieve the said purpose and these provisions are popularly known as MAT (minimum alternative tax). A cursory perusal of the newly inserted provision shows that section 115J was verbatim reintroduced with certain cosmetic changes. We are concerned with sub-section (2) of section 115JA of the Act which reads as under :
"Every assessee, being a company, shall, for the purposes of this section 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."
12. As could be seen from the above, the wordings in the aforesaid sub-section and sub-section (1A) of section 115J are identical, without any change whatsoever. However, two provisos were added to sub-section (2) to section 115JA which reads as under :
"Provided 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 meeting in accordance with the provisions of section 210 of the Companies Act, 1956.
Provided further 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 filling within the relevant previous year."
13. Such provisos were conspicuously absent in section 115J of the Act. A careful reading of the aforesaid provisos indicates the legislative intention insofar as the provisions of section 115JA are concerned. To make it more explicit, we may observe here that for the purpose of arriving at 'book profit' under section 115JA of the Act, the assessee cannot calculate the depreciation by a different method than that adopted for calculating the depreciation for the purpose of preparing the profit and loss account laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956. While introducing the Bill, section 115JA(2) was sans these two provisos. However, at a later stage, two provisos were introduced. The Legislature, under these circumstances, cannot be said to have not been aware of the clear interpretation of the words "for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III ..." in sub-section (2) of section 115JA. As the Legislature did not want to give such benefits to the assessee, two provisos had to be inserted so as to make their intention clear that while working at the 'book profit' under section 115JA, the assessee is duty bound to adopt the depreciation, which was calculated for the purposes of corporate accounting. It is needless to observe here that section 115J is an independent provision. The fact that the two provisos were inserted below sub-section (2) of section 115JA would, in our opinion, make the case of the assessee stronger, inasmuch as, but for the provisos the plain meaning of the words used in section 115JA(2) would be otherwise, i.e., the assessee is free to prepare the profit and loss account for the purposes of section 115JA only. In the absence of such provisos, assessee is free to adopt any one permissible method of calculating depreciation to work out the figure of 'book profit' under section 115J of the Act.
14. Reverting to the facts of the instant case, assessee-company has followed the w.d.v. method for the purpose of preparing profit and loss account under section 115J(1A) of the Act and this method is said to have been consistently followed in the later years. It is also not in dispute that as per provisions of Parts II and III of Schedule VI of the Companies Act, the assessee is entitled to follow either straight line method or w.d.v. method. The method adopted by the assessee-company was rejected solely on the ground that the assessee-company having declared dividends by adopting a particular method of calculating the depreciation, he is precluded from switching over to another method for the limited purpose of working out the 'book profit'. We are unable to appreciate the stand taken on behalf of the revenue. In fact, relevant provisions did not impose any fetter on the assessee to follow a particular method. We, therefore, direct the Assessing Officer to recompute the tax liability under section 115J of the Act in the light of the aforesaid observations.
15. Several other grounds were taken before us. But at the time of hearing, those grounds were not pressed on the ground that the assessee obtained suitable relief in respect of the said grounds. We, therefore, dismiss the aforesaid grounds as not pressed.
16. In the result, the appeal filed by the assessee is partly allowed.