Andhra HC (Pre-Telangana)
V.V. Trans-Investments (P.) Ltd. vs Commissioner Of Income-Tax on 31 December, 1993
Equivalent citations: 1994(2)ALT87, [1994]207ITR508(AP)
JUDGMENT S.V. Maruthi, J.
1. Reference Case No. 126 of 1992 arises out of the order of the Income-tax Appellate Tribunal in I. T. A. No. 1822/(Hyd) of 1990 dated March 23, 1992. Messrs. V. V. Trans-investments (P.) Ltd., Hyderabad, aggrieved by the said order made a Reference Application No. 101/(Hyd) of 1992, before the Appellate Tribunal to refer to this court certain questions of law for the opinion of this court.
2. Writ Petitions Nos. 5408, 6102 and 6141 of 1993 are filed by the Deputy Commissioner of Income-tax (Assessment) - III Hyderabad, Deputy Commissioner of Income-tax (Assessments), Special Range-3, Hyderabad, and the Assistant Commissioner of Income-tax, Investigation Circle-I (1), Hyderabad, respectively, on behalf of the Department, for a writ of certiorari or order or direction, to call for the records relating to I. T. A. No. 1845/(Hyd) of 1990, for the assessment year 1988-89, I. T. A. No. 822/(Hyd) of 1992 for the assessment year 1989-89, respectively, passed by the Income Appellate Tribunal, Hyderabad Special Bench, Hyderabad, dated February 4, 1993, and quash the order of the Special Bench.
3. Messrs. Surana Steels Pvt. Ltd., Secunderabad (first respondent in W. P. No. 5408 of 1993), Messrs. Binjusaria Metal Box Co. (Pvt.) Ltd., Hyderabad (first respondent in W. P. No. 6102 of 1993) and Messrs. Agroha Extraction Ltd., Hyderabad (first respondent in W. P. 6141 of 1993) are the appellants-assessees in the above three income-tax appeals. The Income-tax Appellate Tribunal, Hyderabad Special bench, disposed of all the three appeals by common order dated February 4, 1993, as they involved consideration of common question of law of general importance relating to the construction of section 115J of the Income-tax Act.
4. In R. C. No. 126 of 1992, the Hyderabad bench of the Income-tax Appellate Tribunal, consisting of Sri N. D. Raghavan and Sri Chander Singh, disposed of an appeal filed by the assessee, Messrs. V. V. Trans-Investments (P.) Ltd., Hyderabad, for the assessment year 1989-90, holding that the "loss" as it appears under section 205 (1), first proviso, clause (b), of the Companies Act which was incorporated by reference under section 115J of the Income-tax Act, means excluding depreciation. The Tribunal also confirmed the view expressed by the Income-tax officer and the Commissioner of Income-tax that for arriving at the adjusted book profit, unabsorbed depreciation or business loss, whichever is less, is to be adjusted. Since there was no business loss in earlier years as per the books of account, the amount to be set off was considered as "Nil". Pursuant to a request made by the assessee requiring the Tribunal to refer certain questions to this court, the Tribunal by order dated September 30, 1992, referred the following questions under section 256 (1) of the Income-tax Act for the opinion of this court :
"1. Whether, on the facts and in the circumstances of the case, the interpretation sought to be put on section 115J of the Income-tax Act by the Appellate Tribunal is correct in law ?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that 'loss' as it appears in section 205 (1) first proviso, clause (b) of the Companies Act, 1956, read with section 115J of the Income-tax Act, 1961, means 'including depreciation' ?
3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in placing reliance on the Central Board of Direct Taxes' Circular No. 495 (see [1987] 168 ITR (St.) 87), dated September 22, 1987 ?
4. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in refusing to admit the additional ground ?"
5. The facts in brief in R. C. No. 126 of 1992 are as follows :
The assessee, namely, Messrs. V. V. Trans-Investments (P.) Ltd., Hyderabad, is a private limited company. The first year of assessment of the company was the assessment year 1987-88. The figures of net profit and loss as per the profit and loss account were as follows :
-----------------------------------------------------------------
Assessment Profit/ Depreciation
year loss debited to
P & L
account
-----------------------------------------------------------------
Rs. Rs.
1987-88 (+) 3,087 -
1988-89 (+) 35,79,997 67,75,759
(profit before
depreciation)
(-) 31,95,762
(loss after depreciation)
1989-90 (+) 28,37,947 3,534
-----------------------------------------------------------------
6. The assessee-company had filed its return of income disclosing "nil" income after setting off a part of arrears of depreciation against the current year's profit of Rs. 28,37,947. The contention of the assessee was that for the accounting year relevant to the assessment year under consideration, there was no book profit after adjustment of the earlier years' loss against the current year's profit. The Income-tax Officer, however, computed the book profit under section 115J of the Income-tax Act at Rs. 8,51,380 being 30 per cent of the current year's profit of Rs. 28,37,947 as per the profit and loss account. According to the Income-tax Officer, for arriving at the adjusted book profit, unabsorbed depreciation or business loss, whichever is less, is to be adjusted. Since there was no business loss in earlier years as per the books of account, the amount to be set off was considered as "nil", whereas the assessee contended that earlier years' loss of Rs. 31,94,136, which in fact was unabsorbed depreciation, was to be deducted from current year's profit of Rs. 28,37,947 before arriving at the book profit of Rs. 28,37,947, before arriving at the book profit under section 205 (1), first proviso, clause (b) of the Companies Act, 1956.
7. On appeal, the Commissioner of Income-tax (Appeals) confirmed the view of the Income-tax Officer. On second appeal to the Tribunal the Tribunal distinguished the decision of the Supreme Court in Garden Silk Weaving Factory v. CIT and upheld the view expressed by the Commissioner of Income-tax (Appeals), against which the assessee sought for a reference to this court. Hence the reference in R. C. No. 126 of 1992.
8. Writ Petitions Nos. 5408, 6102 and 6141 of 1993 were filed by the Department challenging the order of the Special Bench of the Income-tax Appellate Tribunal. Hyderabad, consisting of three members, namely Sri Ch. G. Krishnamurthy (President), Sri T. N. C. Rangarajan (Vice-President) and Sri T. V. Rajagopala Rao (Judicial Member) on various grounds.
9. The reason for placing the appeals filed by the assessee-companies before the Special Bench, as given by the Income-tax Appellate Tribunal, is that there are conflicting decisions of the Tribunals in V. V. Trans-Investments (P.) Ltd. v. ITO [1992] 42 ITD 242 (ITAT) of the Hyderabad Bench and in Buttwelded Tools (P.) Ltd. v. Asst. CIT [1991] 39 ITD 432 (ITAT, Mad) on the subject. Therefore, the President, Income-tax Appellate Tribunal, constituted the Special Bench for resolving the issue.
10. According to the Department there is no conflict between Buttwelded Tools (P.) Ltd. v. Asst. CIT [1991] 39 ITD 432 (ITAT. Mad) and V. V. Trans-Investments (P.) Ltd. v. ITO [1992] 42 ITD 242 (ITAT, Hyd), as the decision in Buttwelded Tools (P.) Ltd. v. Asst. CIT [1991] 39 ITD 432 was by a single member of the Madras Bench whereas the decision in V. V. Trans-Investments (P.) Ltd. v. ITO [1992] 42 ITD 242 was by a Division Bench of the Hyderabad Bench. Both the Benches dealt with the interpretation of section 115J of the Income-tax Act. If a Division Bench of the Tribunal considers a decision of the single member and comes to a different view, the decision of the single member stands overruled, if not reversed. The exposition of law of the Division Bench prevails over the single member. Therefore, the reason for the constitution of the Special Bench is a non-existing ground. Therefore, according to the Department, the very constitution of the Special Bench was contrary to the established practice.
11. Reference to a Special Bench is to be made only if another Division Bench considers that the earlier decision of the Tribunal requires reconsideration or there were conflicting decisions of the different Benches, without considering the other decisions. The Income-tax Appellate Tribunal has no power to constitute a Special Bench according to its whims, but the same has to be guided some parameters and established practice. Therefore, according to the Department, the decision of the President to constitute a Special Bench was in total violation of well-settled principles of law. Therefore, reference of the case to a Special Bench was arbitrary and in violation of the procedure governing the constitution of a Special Bench contained in the Tribunal Manual, framed in accordance with section 255 (5) of the Income-tax Act.
12. The next ground on which the decision of the Special Bench is challenged is that there was violation of the principles of natural justice, as the Department was not given an opportunity to represent its case property. It is stated in the affidavit filed in the write petitions that the appeals were posted on January 4, 1993, before the Special Bench. Since any decision on the issue has wide ramifications in terms of tax effect running to about hundred crores of rupees, the Department appointed the petitioner-Deputy Commissioner of Income-tax (Assessments) III. Hyderabad, to appear before the Tribunal, on behalf of the Department, along with standing counsel, to represent the view-point of the Department. The standing counsel could not be present before the Income-tax Appellate Tribunal on January 4, 1993, as he was ill-disposed. Therefore, the petitioner in W. P. No. 5408 of 1993, who was appointed as the designated Officer to represent the case, was present. However, he fell sick as he was suffering from multiple infections. He requested for adjournment to a future date on account of his ill-health. The appellate Tribunal, however, refused to grant the adjournment on January 4, 1993. Therefore, the petitioner was compelled to sit in the court hall which resulted in further deterioration of his health and he was forced to be removed to the hospital Hyderabad Nursing Home, where he was admitted for treatment. The doctor advised him bed rest for a period of four weeks. Therefore, the Department had no other alternative except to press into service Sri M. Mani, another Deputy Commissioner, who was incidentally present to assist the designated officer. Sri M. Mani was not the designated officer and he had to improvise arguments on behalf of the Department in the last minute. The case was heard by the Special Bench on January 4, 1993. On January 5, 1993, another adjournment petition was moved with the medical certificate which was rejected by the Tribunal. Therefore, the Department was forced to argue. Accordingly, Sri M. Mani, Deputy Commissioner of Income-tax, whose services were enlisted as a stop-gap arrangement replied to the submissions of the assessee on January 5, 1993. Sri Mani requested the Tribunal that the petitioner being the designated officer should be allowed to present the view point in regard to certain matters which he was not in a position to argue by way of illustrations and workings of the provisions of section 115J of the Act and time should be given for the said purpose. The Tribunal refused the same. As an alternative, it was requested that the petitioner should be allowed to submit his arguments in writing as he was not in a position to argue the matter and those written submissions may be taken on record. The said request was also rejected by the Tribunal. On January 15, 1993, a miscellaneous petition was filed requesting the Appellate Tribunal to post the case for further hearing so that the Department could have the opportunity of assisting the Tribunal properly and effectively, but no action was taken by the Tribunal on the said petition. The Assistant Registrar of the Income-tax Appellate Tribunal requested the petitioner to submit the workings prepared by him, which he submitted accordingly. The Department requested the Tribunal to post the case for further hearing which was not considered by the Income-tax Appellate Tribunal. Under those circumstances, it is stated that the Department was not given full opportunity to explain its view-point. Therefore, the order of the Special Bench is in violation of the principles of natural justice.
13. It is further stated in the affidavit that the interpretation placed by the Tribunal on section 115J of the Income-tax Act read with section 205 (1) first proviso, clause (b) of the Companies Act is against all canons of interpretation and therefore it is liable to be set aside.
14. In W. P. Nos. 6102 and 6141 of 1993 also, similar grounds are raised.
15. Messrs. Surana Steels (P.) Ltd., first respondent in W. P. No. 5408 of 1993, filed a counter-affidavit, in which it is stated that there was no violation of the principles of natural justice as the appeal was posted on October 28, 1992. November 12, 1992, November 19, 1992. November 20, 1992, November 26, 1992, November 27, 1992, December 4, 1992, December 10, 1992, December 11, 1992, January 4, 1993 and January 5, 1993 and the Department was given opportunity to put forth its case. On all the above dates, the matter was adjourned at the request of the Department on the ground or the other. On January 4, 1993, no adjournment letter was filed and the request of the Department for adjournment in chambers was rejected and the appeal was heard on January 4, 1993, and January 5, 1993. Since the President and the Vice President came from Delhi and Bombay, respectively, specially for hearing the appeals, on January 4, 1993, the Tribunal refused to adjourn to adjourn the matter as the matter was adjourned from time to time on a number of occasions earlier. Though the petitioner fell sick Mr. Mani, presented the case very ably and argued the matter for one and a half days. The matter was adjourned from time to time for procuring the services of the standing counsel and advocate, Sri S. R. Ashok, and the services of Sri S. C. Janini, Deputy Commissioner and Senior Departmental representative in the Tribunal Mr. Srinivasulu, Deputy Commissioner, and Mr. Mani, Deputy Commissioner. Therefore the absence of Sri Srinivasulu, the designated officer, was not a reasonable cause to seek adjournment. It did not in any way, jeopardise the rights of the Department as others were available. Under those circumstances, the case of the petitioner that there was violation of the principles of natural justice is untenable. It is further stated in the counter-affidavit that Mr. Mani himself volunteered to argue the matter.
16. As regard the power of the Tribunal to constitute a Special Bench, it is stated in the counter-affidavit that it is within the discretion of the President as to when a Special Bench is to be constituted and there are no conditions set out in the statute as to when it is to be constituted. The Tax Bar Association of Andhra Pradesh has made a representation on July 25, 1992, stating that there are conflicting decisions of the Tribunal in Buttwelded Tools (P.) Ltd. v. Asst. CIT [1991] 39 ITD 432 (ITAT, Mad) and V. V. Trans-Investments (P.) Ltd. v. ITO [1992] 42 ITD 242 (ITAT, Hyd) in regard to the interpretation of section 115J of the Income-tax Act and, therefore, requested the President of the Tribunal to constitute a Special Bench for authoritative pronouncement on the matter. It is also stated that the decision of the single member Buttwelded Tools (P.) Ltd. v. Asst. CIT [1991] 39 ITD 432 (ITAT, Mad) was followed by two other Benches of the Tribunal, Bombay Tribunal in I. T. A. No. 8606/(Bom) of 1991 dated June 21, 1992, and I. T. A. No. 1437/(Bom) of 1992 dated August 14, 1992. Therefore, there was a difference of opinion between various Benches of the Tribunal on this point. Therefore, the President had rightly thought that the subject-matter in issue was fairly important and chose to constitute the Special Bench. The constitution of the Special Bench is not an issue justiciable and there can be no grievance on the part of the Department or the assessee merely because a Special Bench has been constituted to hear any particular case.
17. As regards the interpretation of section 115J of the Income-tax Act, it is stated that the interpretation given by the Tribunal is correct and does not warrant any interference by this court under article 226 of the Constitution of India.
18. When the writ petitions were taken up for hearing, a request was made by learned counsel for the petitioners that R. C. No. 126 of 1992 which involves consideration of the very same issue as in the writ petitions, may be heard along with the writ petitions. Since the issue involved in the reference case as well as in the writ petitions is one and the same we directed the office to list the reference case along with the writ petitions. Accordingly, R. C. No. 126 of 1992 was listed along with the writ petitions. We heard all the matters together and disposed of them by this common judgment.
19. Before the matters were heard on merits, Sri Ranganathachary, learned counsel appearing of the applicant in the reference case made a request that he may be permitted to withdraw the reference case made at the instance of the applicant, in view of the decision of the Special Bench holding in favour of the applicant assessee. Therefore, at the first instance, we heard the arguments of Sri Ranganathachary on the powers of the court to dispose of the reference on merits on the facts and circumstances of the case.
20. Sri Ranganathachary submitted that in view of the decision of the Special Bench on the interpretation of section 115J of the Income-tax Act, the issue in the reference had become academic and, therefore, it is not necessary for his court to answer the reference made by the Division Bench of the Tribunal and in support of his contention, he relied on the following decisions :
In CIT v. Smt. Anusuya Devi , the Supreme Court held that (headnote) :
"The High Court is however not bound to answer a question merely because it is raised and referred. It is well-settled that the High Court may decline to answer a question of fact or a question of law which is purely academic or has no bearing on the dispute between the parties or though referred by the Tribunal does not arise out of its order. The High Court may also decline to answer a question arising out of the order of the Tribunal, if it is unnecessary or irrelevant or is not calculated to dispose of the real issue between the taxpayer and the Department. There is also no ground for restricting that powers when by an erroneous order the High Court had directed the Tribunal to state a case on a question which does not arise out of the order of the Tribunal. At the hearing of a reference pursuant to an order calling upon the Tribunal to state case, the High Court is not bound to answer the question without considering whether it arises out of the order of the Tribunal, whether it is a question of law, or whether it is academic, unnecessary or irrelevant."
21. The next decision relied upon is a decision of this court in K. Ch. Venkataratnam v. CGT , wherein it was held thus (headnote) :
"If a party fails to appear or take any interest in the reference made to the High Court under section 26 (2) of the Gift-tax Act, 1958, the High Court is not bound to answer the reference and it may refuse to do so. When an assessee makes a request to withdraw the reference or says he was not interested in pursuing the matter, it is left to the High Court, having regard to the circumstances of the case, either to accede to his request and decide not to answer the reference or to proceed to answer the reference in spite of such a request."
22. The Rajasthan High Court in Maharaja Shri Umaid Mills v. CIT held that (headnote) :
"When an assessee makes a request to withdraw a reference or says that he is not interested in pursuing the matter, it is for the court, having regard to the circumstances of the case, either to accede to his request and decide not to answer the reference or to proceed to answer the reference to spite of such a request...
In the circumstances of the case, it would be wholly unnecessary for the court to decide the question which had now become merely of academic importance and the reference could be withdrawn."
23. Sri Ranganathachary submitted that, in view of the above decisions, since the issue involved in the reference had already been decided in favour of the assessee in the reference by the Income-tax Appellate Tribunal, the issue is academic and as such it is not necessary for the court to answer the reference and he may be permitted to withdraw the same.
24. Learned counsel appearing the Department filed a reply to the petition of withdrawal stating that aggrieved by the order of the Commissioner (Appeals) allowing the appeal filed by the assessee, the Revenue filed an appeal before the Income-tax Appellate Tribunal in I. T. A. No. 929/(Hyd) of 1993 on May 20, 1993, and the same is pending consideration before the Appellate Tribunal. It is also stated that even if the assessee withdraws the reference, the same issue would have to be gone into once again in the said appeal which is pending before the Appellate Tribunal. Further, 36 other appeals involving similar issues are pending consideration before the Income-tax Appellate Tribunal awaiting judgment of this court in the present reference. The scope and ambit of section 115J of the Income-tax Act particularly with reference to clause (IV) of the Explanation is an important question of law having substantial effect on the assessments of various companies. Having regard to the fact that the question of law is an important one and having wider ramifications, it is just and necessary that the issue may be decided by this court at the earliest. Therefore, the issue involved in R. C. No. 126 of 1992 had not become academic, and in fact is an issue material for decision in the petitioner's case in I. T. A. No. 929/(Hyd) of 1993. Under those circumstances, the petitioner cannot be permitted to withdraw the reference.
25. In view of the above, the question that arises for consideration is, whether the court is bound to answer the reference on the facts and circumstances of the case.
26. In Anusuya Devi's case , the Supreme Court referred to the circumstances under which the High Court referred to the circumstances under which the High Court is not bound to answer the reference, according to which, if the question of fact or question of law is purely academic and has no bearing on the dispute between the parties, or it is unnecessary or irrelevant or is not calculated to dispose of the real issue between the taxpayer and the Department, the High Court is not bound to answer the question. That was a case where the very basis of the question of which the Tribunal was called upon to submit a statement of the case did not exist. Therefore, under those circumstances, the Supreme Court made the above observations. In other words, the High Court need not answer the reference unless it arises from out of order of the Tribunal or it is academic or irrelevant or unnecessary. Therefore, we have to see whether the issue involved in this case is academic, unnecessary, irrelevant or does not arise from out of the order of the Tribunal. The contention of the Revenue is that 36 appeals, involving the same issue, are pending before the Tribunal and the revenue involved is Rs. 100 crores. Further, challenging the order of the Special Bench of the Tribunal, the Department has filed three writ petitions on various grounds. Therefore, under those circumstances, it cannot be held that the issue involved in the reference is academic or irrelevant or unnecessary or does not arise out of the order of the Tribunal. Further, the issue directly arises out of the order of the Special Bench of the Income-tax Appellate Tribunal which was challenged in the writ petitions and, therefore, it is not a case where the assessee in R. C. No. 126 of 1992 should be permitted to withdraw the reference. Therefore, we proceed to answer the reference. Since the issue involved in the reference and also in the writ petitions in one and the same we will consider the same at a later stage.
27. The next question to be considered is, whether there is violation of the principles of natural justice when the matter was heard by the Special Bench.
28. We have already stated the averments made in the affidavit filed in support of the writ petitions and also to the averments made in the counter-affidavit. It is true that the matter was adjourned at the instance of the Department Representative from time to time on 11 occasions from October 28, 1992, to January 5, 1993. On January 4, 1993, when the matter was posted, the petitioner, viz., Sri H. Srinivasulu, who was appointed as the designated officer to argue the matter fell sick. It is also not disputed that he was shifted to Hyderabad Nursing Home and the doctors advised him rest for four weeks. It is also true that Sri Mani, another Deputy Commissioner, who was appointed to assist Sri Srinivasulu, was ready to argue the matter, and in fact he argued the matter to the best of his ability. However, in view of the complicated nature of the case and the heavy revenue involved in the matter and also keeping in view that any decision rendered by the special Bench of the Tribunal will have an all-India effect, to supplement the arguments of Sri Mani, the Department sought permission of the Tribunal to file written submissions. It is not disputed that the Tribunal did not permit the Departmental Representative to file their written submissions. Admittedly, Sri Srinivasulu who was instructed to appear in the matter could not appear on behalf of the Department and justice to the case. It may be that Mr. Mani might have argued the matter ably, but the fact remains that the Department could not project its case in its proper perspective. Further, there is no reason why the Departmental Representative should not have been permitted by the Tribunal in not permitting the Departmental Representative to file the written submissions is unreasonable and arbitrary. The fact that earlier the matter was adjourned on eleven occasions is not a ground to refuse adjournment of the case on January 4, 1993, when Sri H. Srinivasulu, Deputy Commissioner of Income-tax, who was specially engaged to represent on behalf of the Department in the matter, fell sick. Under those circumstances, we are of the view that the attitude of the Tribunal is not only unreasonable but also arbitrary, and the Departmental Representative was not given proper opportunity to project the case of the Department. Therefore, there is violation of the principles of natural justice by the Tribunal in not affording an effective opportunity to the Department to project its case.
29. The next question to be considered is, where the constitution of the Special Bench of the Tribunal, on the facts and circumstances of the case, is valid. In this connection, section 255 of the Income-tax Act which provides for the procedure of the Appellate Tribunal is relevant, sub-section (3) of section 255 empowers the President or any other member of the Appellate Tribunal authorised in this behalf by the Central Government, sitting singly, to dispose of any case which has been allotted to the Bench of which he is a member and which pertains to an assessee whose total income as computed by the authority does not exceed one lakh rupees. It also empowers the President to constitute a Special Bench consisting of three or more members, one of whom shall necessarily be a judicial member and one an accountant member, to dispose of any particular case. Sub-section (4) of section 225 provides that if there is a difference of opinion on any point between the members of a Bench, the point or points on which they differ, and the case shall be referred by the President of the Appellate Tribunal for hearing such point or points by one of more of the other members of the Appellate Tribunal, and it shall be decided according to the majority opinion of the members. Therefore, the power to constitute a Special Bench consisting of three or more members is vested in the President under section 255 (3) of the Act for the disposal of any particular case particular case and section 254 (4) is not relevant. The case of the Department is that there was no occasion for the President to constitute a Special Bench under section 255 (3) of the Act as there is no conflict between the two decisions of the Madras Bench and Hyderabad Bench. The reason for the constitution of the Special Bench with three members, according to the President, was that there is a conflict of opinion between the decision of the single member of the Madras Bench (Buttwelded Tools (P.) Ltd. v. Asst. CIT [1991] 39 ITD 432) and the decision of the Division Bench of the Hyderabad Income-tax Appellate Tribunal (V. V. Trans-Investments (P.) Ltd. v. ITO [1992] 42 ITD 242) in regard to the interpretation of section 115J of the Income-tax Act. The reason given for the constitution of the special Bench that there was a conflict of opinion between Buttwelded Tools (P.) Ltd. v. Asst CIT [1991] 39 ITD 432 (ITAT, Mad) and V. V. Trans-Investments (P.) Ltd. v. ITO [1992] 42 ITD 242 (ITAT, Hyd) is not relevant as the decision of the single member of the Appellate Tribunal is not relevant as the decision of the single member of the Appellate Tribunal will get automatically overruled by the decision of the Division Bench and the order of the Division Bench alone will prevail. Therefore, there was no occasion for the constitution of a Special Bench. The facts that the view expressed by a single member in Buttwelded Tools (P.) Ltd. v. Asst. CIT [1991] 39 ITD 432 (ITAT, Mad) was followed by the Division Bench of the Bombay Tribunal in I. T. A. No. 8606/(Bom) of 1991 dated June 21, 1992, and I. T. A. No. 1437/(Bom) of 1992 dated August 14, 1992, was not before the President when he constituted the Special Bench. The other reason for the constitution of the Special Bench was that the President of the Tax Bar Association of Andhra Pradesh Addressed a letter to the President on July 25, 1992, requesting him to refer the matter relating to the interpretation of section 115J of the Income-tax Act to a Special Bench to have uniformity of decisions on the point. On the basis of this letter, the President called for the comments of the senior member of the Income-tax Appellate Tribunal after consulting the other members of the Tribunal. After ascertaining the views of the member of the Tribunal, the senior member suggested constitution of a Special Bench and the reasons for the constitution of the Special Bench are stated in the reference dated September 25, 1992, forwarded to the President. In the said reference, the reasons for constituting a Special Bench are stated to be the articles published in 50 Taxman 659 (Magazine Section), 47 Taxman 133 (Magazine Section), 48 Taxman 347 (Magazine Section), 49 Taxman 49 and 133 (Magazine Section) and the diametrically opposite views expressed in two decisions of the Tribunal reported in Buttwelded Tools (P.) Ltd. v. Asst. CIT [1991] 39 ITD 432 (ITAT, Mad) and V. V. Trans-Investments (P.) Ltd. v. ITO [1992] 42 ITD 242 (ITAT. Hyd)
30. It is true that under section 255 (3) of the Income-tax Act, the President is vested with the power to constitute a Special Bench consisting of three or more members to dispose of any particular case. It is also true that discretion is vested in the President for the constitution of a Special Bench. However, that discretion has to be exercised judiciously and judicially and it cannot be exercised at the whims and fancies of the President. Admittedly, on the facts of the present case, there is no conflict at all between Buttwelded Tools (P.) Ltd. v. Asst. CIT [1991] 39 ITD 432 (ITAT, Mad) and V. V. Trans-Investments P. Ltd. v. ITO [1992] 42 ITD 242 (ITAT, Hyd), as the decision in Buttwelded Tools (P.). Ltd. v. Asst. CIT [1991] 39 ITD 432 was a decision rendered by a single member of the Madras Bench of the Appellate Tribunal, whereas the decision in V. V. Trans-Investments P. Ltd. v. ITO [1992] 42 ITD 242 was a decision rendered by a Division Bench of the Hyderabad Bench of the Appellate Tribunal. Therefore, the Division Bench of the Appellate Tribunal of the Hyderabad Bench will prevail over the decision of the single member of the Madras Bench of the Appellate Tribunal. Articles written by various authors in the Magazines cannot be the basis for making a reference to the Special Bench, as each author may express his own view and, on that basis, the President cannot exercise the power to refer the matter to a Special Bench. Therefore, on the facts of this case, the constitution of the Special Bench, was on non-existing grounds. We are of the view that the exercise of power by the President in constituting a Special Bench was arbitrary and unreasonable. As already stated, the power to constitute a Special Bench under section 255 (3) of the Act shall be exercised arbitrarily at the whims and fancies of the authority vested with such power.
31. We see considerable force in the submission of counsel for the petitioners that unless reference is made in a judicial order by a Bench of the Tribunal pointing out the reasons for constitution of a Special Bench, the President of the Income-tax Tribunal was not competent to constitute a Special Bench. In the present case, admittedly, none of the Benches of the Tribunal has made any reference by a judicial order when the question came up for consideration and the conflict of decisions of co-ordinate Benches was adverted to. The procedure adopted in this case seems to us to be curious. On receipt of representation by the Tax Bar Association, the President of the Tribunal invited comments from the senior member of the Hyderabad Bench of the Tribunal. It is more curious that the very same member who had rendered judgment which was reported in V. V. Trans-Investments (P.) Ltd. v. ITO [1992] 42 ITD 242 (ITAT, Hyd) replied to the President suggesting the constitution of the Special Bench. Counsel for the petitioner submits that in the facts and circumstances of the case that was but a command performance at the instance of the President. He submits further that since there was no judicial order requesting for a reference of any question to a Special Bench, the constitution of the same was not justified. We see considerable force in the submission, since courts or judicial tribunals are expected to discharge their judicial functions by passing judicial orders and not by intra-departmental communications. We also see force in the submission of counsel that had the matter been posted for hearing on the judicial side, the Department would have had an opportunity to project its views before the Hyderabad Bench, deliberated upon the alleged conflict of authorities, rather than depending on views expressed in articles and journals as reason for constitution of a Special Bench.
32. The next question to be considered is, whether the view expressed by the Special Bench on the interpretation of section 115J of the Income-tax Act is correct.
33. Before referring to the interpretation placed by the Special Bench of the Tribunal, it may be relevant to quote section 115J of the Income-tax Act, which reads as follows :
"115J. Special provisions relating to certain companies. - (1) Not-withstanding anything contained in any other provision of this Act, where in the case of an assessee being a company other than a company engaged in the business of generation or distribution of electricity, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1988, but before the 1st day of April, 1991 (hereafter in this section referred to as the relevant previous year), is less than thirty per cent. of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent. of such book profit.
(1A) Every assessee, being a company, shall, for the purpose 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 (1 of 1956).
Explanation. - For the purpose of this section, 'book profit' means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (1A), as increased by - ...
if any amount referred to in clauses (a) to (f) is debited or, as the case may be, the amount referred to in clauses (g) and (h) is not credited to the profit and loss account, and as reduced by, - ..
(iv) the amount of the loss or the amount of depreciation which would be required to be set off against the profit of the relevant previous year as if the provisions of clause (b) of the first proviso to sub-section (1) of section 205 of the Companies Act, (1 of 1956), are applicable.
(2) Nothing contained in sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of sub-section (2) of section 32A or clause (ii) of sub-section (1) of section 72 or section 73 or section 74 or sub-section (3) of section 74A or sub-section (3) of section 80J."
34. In other words, section 115J says that in the case of an assessee, being a company, though the total income under the Income-tax Act in respect of the previous year is less than thirty per cent. Of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent. Of such book profit. Under sub-section (1A), the assessee shall prepare its profit and loss account for the relevant previous year in accordance with 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. Under the Explanation, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year, as increased under clauses (a) to (ha) and as reduced under clauses (i) to (iv) referred to in the Explanation to sub-section (1A). Under clause (iv) referred to in the Explanation of sub-section (1A), the amount of the loss or the amount of depreciation which is required to be set off against the profit of the relevant previous year have to be worked out in accordance with the provisions of section 205 (1), first proviso, clause (b) of the Companies Act. In other words, in the case of an assessee which is a company, if the total income of the previous year is less than thirty per cent. of its book profit, then, the total income of such company shall be deemed to be an amount equivalent to thirty per cent. of such book profit, and such income shall be chargeable to tax.
35. We may now refer to Parts II and III of Schedule VI of the Companies Act. Part I-A of Schedule VI of the Companies Act deals with the preparation of balance-sheet in horizontal form and Part II-B deals with the preparation of balance-sheet in vertical form. Part II deals with the requirements of profit and loss account. One of the items to be shown in the profit and loss account is "depreciation" which is one of the items of fixed assets. Section 205 (1), first proviso, clause (b) which is relevant for the purpose of calculating the net profit reads as follows :
"205. (1) No dividend shall be declared or paid by a company for any financial year except out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2) or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with those provisions and remaining undistributed or out of both or out of moneys provided by the Central Government or a State Government for the payment of dividend in pursuance of a guarantee given by that Government :
Provided that - ....
(b) if the company has incurred any loss in any previous financial year or years, which falls or fall after the commencement of the Companies (Amendment) Act, 1960, then, the amount of the loss or an amount which is equal to the amount provided for depreciation for that year or those years whichever is less, shall be set off against the profits of the company for the year for which dividend is proposed to be declared or paid or against the profits or the company for any previous financial year or years, arrived at in both cases after providing for depreciation in accordance with the provisions of sub-section (2) or against both;..."
36. From the above, it is clear that in a case where under the Income-tax Act, the income of the company is less per cent. Of its books profit, then, its total income shall be deemed to be thirty per cent. Of the book profit which is taxable and the profit and loss account is to be prepared in accordance with Parts II and III of Schedule VI of the Companies Act, and while arriving at the net profit, where the company has incurred loss in any previous financial year, the amount of loss or the amount which is equivalent to the amount provided for depreciation for that year or those years whichever is less, shall be set off against the profits.
37. In other words, if the total income of a company is less than thirty per cent. of its book profits, the total income shall be deemed to be an amount equal to thirty per cent. of such book profit. The assessee has to first compute the total income in accordance with the Income-tax Act and if the total income is less than thirty per cent. of the book profits, then, it has to prepare a profit and loss account under sub-section (1A) of section 115J for the relevant previous year in accordance with Parts II and III of Schedule VI of the Companies Act. The book profits so arrived at as per the profit and loss account under the Companies Act. The book profits so arrived at as per the profit and loss account under the Companies Act, shall be adjusted by addition of the various amounts enumerated under clauses (a) to (ha) under the Explanation to section 115J and reduced by the amounts mentioned under clauses (i) to (iv) enumerated under the Explanation. Clauses (i) to (iii) are not relevant for the purpose of our case. The controversy is with regard to the interpretation of clause (iv) under the Explanation to section 115J.
38. Before referring to the interpretation to be placed on clause (iv) under the Explanation of section 115J, we may point out that section 115J begins with a non-obstante clause, which means that though the total income of a company is not taxable in the normal circumstances, having regard to the fiction created in the section, thirty per cent. of the book profit is liable to be taxed. Under clause (iv) of the Explanation, the book profits so prepared shall be reduced by the amount of the loss or the amount of depreciation which would be required to be set off against the profit of the relevant previous year as if the provisions of section 205 (1), first proviso, clause (b) of the Companies Act are applicable. From the above, it is clear that the intention of the Legislature is to incorporate section 205 (1), first proviso clause (b) of the Companies Act. In this connection, we may refer to the judgment of the Supreme Court in Bolani Ores Ltd. v. State of Orissa, , wherein the learned judges observed thus (headnote) :
"If the Orissa Motor Vehicles Taxation (Amendment) Act, 1943, incorporating the definition of 'motor vehicles' referred to the definition of 'motor vehicle' under the Act as then existing, the effect of this legislative method would amount to an incorporation by reference of the provisions of section 2 (18) of the Motor Vehicles Act in section 2 (c) of the Taxation Act. Any subsequent amendment in Motor Vehicles Act or a total repeal of the Act under a fresh legislation on that topic would not affect the definition of 'motor vehicle' in section in 2 (c) of the Taxation Act."
39. The next decision to be considered is Mahindra and Mahindra Ltd. v. Union of India [1979] 49 Comp Cas 419 (SC). The question that arose for consideration in this case is what is the scope of section 55 of the Monopolies and Restrictive Trade Practices Act, 1969. Section 55 of the said Act provides that any person aggrieved by an order made by the Central Government under Chapter III or Chapter IV or, as the case may be, of the Commission under section 13 or section 37, may within 60 days from the date of the order, prefer an appeal to the Supreme Court that the reference to section 100 of the Code of Civil Procedure in section 55 of the Monopolies and Restrictive Trade Practices Act amounted to repeal and re-enactment of the former section 100 and, therefore, the appeal could be maintained only on the grounds specified in the new section 100, i.e., of a substantial question of law. While rejecting the said argument, the Supreme Court observed that (at page 439 of 49 Comp Cas) :
"It ignores the distinction between a mere reference to or citation of one statute in another and an incorporation which in effect means bodily lifting a provision of one enactment and making it a part of another. Where there is mere reference to or citation of one enactment in another without incorporation, section 8 (1) applies and the repeal and re-enactment of the provision referred referred to or cited has the effect set out in that section and the reference to the provision repealed is required to be construed as reference to the provision as re-enacted....... But where as provision of one statute is incorporated in another, the repeal or amendment of the former does not affect the latter. The effect of incorporation is as if the provision incorporated were written out in the incorporating statute and were a part of it. Legislation by incorporation is a common legislative device employed by the Legislature, where the Legislature for convenience of drafting incorporates provisions from an existing statute by reference to that statute instead of setting out for itself at length the provisions which it desires to adopt. Once the incorporation is made, the provision incorporated becomes an integral part of the statute in which it is transposed and thereafter there is no need to refer to the statute from which the incorporation is made and any subsequent amendment made in it has no effect on the incorporating statute".
40. The learned judges referred to the observations made by Lord Esher M. R. in Wood's Estate, In re [1886] 31 Ch D 607, 615 (CA), which were to the following effect (at page 440 of Comp Cas) :
"If a subsequent Act brings into itself by reference, some of the clauses of a former Act, the legal effect of that, as has often been held, is to write those sections into the new Act just as if they had been actually written in it with the pen, or printed in it, and, the moment you have those clauses in the later Act, you have no occasion to refer to the former Act at all".
41. The learned judges also referred to the observations of Lord Justice Brett in Clarke V. Bradlaugh [1881] 8 QBD 63, 69 (CA) that (at page 440 of 49 Comp Cas) :
"........ there is a rule of construction that, where a statute is incorporated by reference into a second statute, the repeal of the first statute by a third statute does not affect the second".
42. On a consideration of the judgment of the Privy Council in Secretary of State for India in Council v. Hindustan Co-operative Insurance Society Ltd., AIR 1931 PC 149 and other judgments, the Supreme Court held that section 55 of the Monopolies and Restrictive Trade Practices Act is an instance of legislation by incorporation and not legislation by reference.
43. We may also refer to another decision of the Supreme Court in Onkarlal Nandlal v. State of Rajasthan . We may briefly refer to the facts of this case. The assessee is a registered dealer under the Rajasthan Sales Tax Act as well as under the Central Sales Tax Act. He purchased poppy seeds against declarations under Form No. ST 17 furnished to the selling dealers stating that the purchases were for the purpose of resale within the State. Thereafter, the assessee resold the poppy seeds to different buyers under contracts executed by and between the assessee and the buyers at mandis inside the State. The poppy seeds were specific goods in deliverable condition situate in the mandi and the property in the seeds accordingly passed to the buyers under the contracts in the mandi. The question that was raised was, when an assessee purchases goods from a selling dealer against a declaration in Form No. ST 17 stating that the goods are being purchased by him for resale within the State and he then proceeds to resell the goods and such resale is in the course of inter-State trade or commerce, would such resale be liable to be regarded as a sale not within the State for the purpose of the declaration in Form No. ST 17, merely because it is a sale in the course of inter-State trade or commerce. Sub-section (o) of section 2 of the Rajasthan Sales Tax Act defines sale to mean "any transfer of property in goods for cash or for deferred payment or for any other valuable consideration". The second explanation thereunder says that : "A transfer of property in goods shall be deemed to have been made within the State if it fulfils the requirements of sub-section (2) of section 4 of the Central Sales Tax Act, 1956 (Central Act 74 of 1956). Section 4 of the Central Sales Tax Act reads as follows :
"4. When is a sale or purchase of goods said to take place outside a State. - (1) Subject to the provisions contained in section 3, when a sale or purchase of goods is determined in accordance with sub-section (2) to take place inside a State, such sale or purchase shall be deemed to have taken place outside all other States.
(2) A sale or purchase of goods shall be deemed to take place inside a State, if the goods are within the State -
(a) in the case of specific or ascertained goods, at the time the contract of sale is made; and........"
44. Considering the scope of Explanation II to sub-section (o) of section 2, it was held that (at page 415) : ".......... The State Legislature could have very well reproduced the entire language of sub-section (2) of section 4 bodily in Explanation II to sub-section (o) of section 2, but it preferred to employ a simpler device by incorporating by reference the provisions of sub-section (2) of section 4 in Explanation II to sub-section (o) of section (2). The doctrine of incorporation by reference has been succinctly explained by Lord Esher M. R. in In re Wood's Estate [1886] 31 Ch D 607 (CA) in the following words......" This court also explained the doctrine of incorporation by reference in similar terms in Shamrao V. Parulekar v. District Magistrate, Thana, , and observed : "The rule is that when a subsequent Act amends an earlier one in such a way as to incorporate itself, into the earlier, then the earlier Act must thereafter be read and construed (except where that would lead to a repugnancy, inconsistency or absurdity) as if the altered words had been written into the earlier Act with pen and ink and the old words scored out so that thereafter there is no need to refer to the amending Act at all".
45. From the above, it follows that the provision of an enactment can be incorporated into another enactment by reference. If such an incorporation is made, it is not necessary to refer to the parent Act from which the provision is borrowed. It is to be incorporated as if the provision is made in the enactment where it is incorporated. We have already referred to clause (iv) under the Explanation to section 115J of the Income-tax Act. In view of the law laid down by the Supreme Court, it is an instance of legislation by incorporation. In other words, section 205 (1) (b) of the Companies Act is actually written in clause (iv) under the Explanation to section 115J of the Income-tax Act and, therefore, there is no occasion to refer to the Companies Act, 1956, at all.
46. Therefore, while construing the provision of section 115J of the Act, there is no need to refer to the provision of section 205 (1), first proviso, clause (b) of the Companies Act from which the provision in section 115J is borrowed and we must proceed to apply the provision of section 115J of the Income-tax Act, as if section 205 (1), first proviso, clause (b) of the Companies Act was written out verbatim in section 115J of the Income-tax Act. In other words, when once the provision under section 205 (1), first proviso, clause (b) is incorporated in clause (iv) of the Explanation to section 115J of the Income-tax Act, it is only the said provision that is so incorporated that has to be looked into for the purpose of interpreting the scope and ambit of clause (iv) under the Explanation to section 115J.
47. The next question to be considered is what is the scope of clause (iv) under the Explanation to section 115J of the Income-tax Act. Before considering this, we may refer to the object and background under which section 115J came to be enacted.
48. Section 115J was introduced in the assessment year 1988-89. Prior to the insertion of this provision, section 80VVA provided for payment of tax on at least thirty per cent. of the income. Studies carried out by the Central Board of Direct Taxes revealed that while the provisions of section 80VVA had the effect of subjecting companies to minimum tax which they would have otherwise not paid, there were still companies which had no income-tax liability despite substantial profits, on account of the fact that companies were availing of depreciation in full under the Income-tax Act. Therefore, despite section 80VVA, the phenomenon of prosperous zero tax companies continued. A study carried out by an economic journal in regard to the performance of 650 top companies during the assessment year 1984-85 showed that out of the top 23 profit-making companies, the profit and loss accounts of 12 companies showed no income-tax liability though they had profits and had declared dividends. About 28 per cent. of the companies (139 companies) accounting for a net profit of Rs. 274 crores showed no tax liability. Therefore, section 80VVA had become otiose. Therefore, the necessity to introduce the impugned provision, viz., section 115J, arose in order to tackle the problem of zero tax by suitably modifying section 80VVA. With the avowed object of bringing the zero tax prosperous companies within the taxable net, section 115J has been enacted.
49. Before considering clause (iv) under the Explanation to section 115J, it is necessary to understand the concepts of "loss" and "depreciation" under the Income-tax Act. We have already expressed our view that while interpreting clause (iv) under the Explanation to section 115J, it is not necessary to refer to the Companies Act, 1956, but the interpretation of the clause should be in accordance with the provisions of the Income-tax Act.
50. Before considering the concepts of "loss" and "depreciation" under the Income-tax Act, briefly, we may refer to the procedure for determining the total income of an assessee in respect of a previous year. The total income is classified under five heads. They are : (A) Salaries; (C) Income from house property; (D) Profits and gains of business, profession or vocation (briefly, "business income"); (E) Capital gains; and (F) Income from other sources. ('B' omitted). An assessee may have different sources of income under the same head. In other words, if the assessee carries on several business, the income of each and every such business has to be separately computed by allowing against the gross profits and gains of that business only, the deductions relevant and appropriate to that business. For arriving at the figure of income assessable under a particular head, the individual figures in respect of all the sources have to be aggregated. Under the head "Profits and gains of business", profession or vocation, the statute contemplates the computation of the profits and gains of each business, profession or vocation carried on by the assessee separately. The result of such computation may be either a profit or loss. Section 28 of the Act deals with business and section 29 says that the income referred to in section 28 shall be computed in accordance with sections 30 to 43C of the Act. Section 32 deals with "depreciation". Under section 32, allowance is granted in respect of depreciation in the value of certain capital assets which is a legitimate deduction in determining the true properties. It is not necessary or relevant to refer to the conditions subject to which the assessee is entitled to depreciation. Section 32 (2) which is relevant in the context of the facts of the present case is as follows :
"Where, in the assessment of the assessee (or, if the assessee is a registered firm or an unregistered firm assessed as a registered firm, in the assessment of its partners), full effect cannot be given to any allowance under clause (ii) of sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, the allowance or part of the allowance or part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, and so on for the succeeding previous years".
51. As pointed out earlier under section 28 of the Act, tax is chargeable on the aggregate profits of the business carried on by the assessee. It is the net profits and gains after specified deductions that are subjected to tax. One of such deductions pertains to depreciation allowance at the prescribed rate percentage of the written down value of the business asset. Under section 32 (2), if the profits of a particular business are insufficient to absorb the depreciation allowance, it can be set off under section 70 against the profits of any other business. If there are no profits chargeable under this head or if the profits chargeable under this head are insufficient to cover the depreciation allowance, it may be set off under section 71 of the Act against profits chargeable under any other head for that year. If still some part of the depreciation allowance remains unabsorbed, it may be carried forward to the following year and set off against that year's profits and so on for succeeding years and it is deemed to be part of the current depreciation. In this context, we may refer to the judgment of the Supreme Court in CIT v. Jaipuria China Clay Mines (P.) Ltd. , wherein it was held that :
"The unabsorbed depreciation allowance is carried forward under the proviso (b) to section 10 (2) (vi) and the method of carrying it forward is to add it to the amount of the allowance or depreciation in the following year and deeming it to be art of that allowance; the effect of deeming it to be part of that allowance is that it falls in the following year within clause (vi) and has to be deducted as allowance".
52. It follows from the above that depreciation is an allowance on the capital value of the asset. It is a charge on the profits and gains of business. If the profits and gains of the business are not sufficient to set off the depreciation, it can be carried forward and no time limit is prescribed for the same. It can be set off and deducted from income under any other head.
53. The next aspect to be considered is the concept of "loss" under the Income-tax Act. Section 70 of the Act provides that where the net result for any assessment year in respect of any source falling under any head of income is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head. Section 71 provides that where in respect of any assessment year the net result of the computation under any head of income is a loss and the assessee had no income, the assessee shall, subject to the provision of the Chapter, be entitled to have the amount of such loss set off against his income, if any, assessable for that assessment year under any other head. Section 72 provides for carry forward and set off of business losses. Sub-section (2) of section 72 which is relevant in the context of the present case, says that "where any allowance or part thereof is, under sub-section (2) of section 32 or sub-section (4) of section 35, to be carried forward, effect shall first be given to the provisions of this section".
54. A reading of sections 70, 71 and 72 of 72 of the Act is that one of the important consequences which follows from the principle that income-tax is only one tax and there are not as many taxes as there are heads of income, is that a loss sustained in any year under one head should be set off against income under another head in that year, in order to arrive at the true total income of the assessee. If the net result in respect of any source under any head is a loss, that loss may be set off under section 70 against income from another source under the same head. In other words, loss in business may be set off against the income from property and loss under the head "Income from other sources" may be set off against the profits of business.
55. The above provisions are subject to the conditions provided under the Act itself. Section 72 provides for carrying forward the losses. From the above narration, it follows that under the Income-tax Act, depreciation and loss are treated as distinct concepts. Unabsorbed carry forward business loss can be set off only against business income of the following year or years while unabsorbed depreciated can be set off against income under any other head. Further, while the former can be carried forward for a limited number of years, there is no time-limit for carrying forward the unabsorbed depreciation. Further, while carrying forward the depreciation allowance, effect shall first to be given to section 72 which provides for carry forward of loss. Now, we may refer to clause (iv) under the Explanation to section 115J of the Act, according to which, if the company has incurred any loss in the previous financial year, then the amount of the loss or an amount which is equal to the amount provided for depreciation for that year or those years, whichever is less, shall be set off against the profits of the company for the year for which dividend is proposed to be declared. For instance, if a company has a total income of Rs. 1,000 for the assessment year 1990-91 and if it had a loss of Rs. 600 during the previous year i.e., 1989-90 and depreciation is declared at Rs. 400, then, according to clause (iv) under the Explanation to section 115J of the Act, from out of the income of Rs. 1,000, Rs. 400 which is a deduction allowable towards depreciation is only to be reduced.
56. Under section 72 unabsorbed business loss can be carried forward and set off against profits and gains of business income only, though for the relevant assessment year, business loss can be set off against the income under any other head, whereas in the case of unabsorbed depreciation, it can be carried forward and set off against the profits and gains under any other head. This makes all the distinction between unabsorbed loss and unabsorbed depreciation under the Income-tax Act. In this context, we may refer to the judgment of the Supreme Court in CIT v. Mother India Refrigeration Industries P. Ltd. . The Supreme Court also considered the tax reference of Hindustan Vacuum Glass Ltd. v. CIT in the said judgment. The facts in Mother India Refrigeration's case , briefly, are that at the end of the assessment year 1950-51, there was an unabsorbed business loss of Rs. 67,534 and unabsorbed account the current depreciation was Rs. 1,78,154. The assessee's income without taking into account the current depreciation was Rs. 50,624 in 1951-52 and Rs. 64,332 in 1952-53. The contention of the assessee was that from out of the income, the unabsorbed loss for the previous year should be set off before deducting the current year's depreciation. He did not succeed before the Income-tax Officer. The matter was carried to the High Court. The High Court agreed with the assessee holding that from the income of the assessment year before deducting current depreciation, business loss of the previous year should be set off. In the tax reference case, the assessment year related to 1969-70. The assessee filed a return declaring a loss of Rs. 50,736. He also filed a revised return claiming a set off of the carried forward loss of the previous years from out of the income of that hear without making any allowance for the current year's depreciation. The matter was carried to the High Court. In the High Court the question that was considered was, whether the depreciation for the current year should first be deducted before deducting the unabsorbed carried forward business losses. The learned judges pointed out the distinction between the unabsorbed loss and unabsorbed depreciation. According to the learned judges, unabsorbed carried forward business loss can be set off against business income of the following year or years, whereas depreciation can be deducted from income under any other head, the former can be carried forward for a limited number of years whereas there is no time-limit for carrying forward the depreciation. The unabsorbed business loss has priority over unabsorbed depreciation and current depreciation has priority over unabsorbed loss. In other words, unabsorbed carried forward loss will have to be set off after deducting the current year's depreciation. It was also pointed out that under section 10 (2) (iv) the fiction is created that unabsorbed depreciation with or without current year's depreciation shall be deemed to be the current year's depreciation and is only for a particular purpose, namely, for carrying forward and setting it off against the income under any other head and not for the purpose of giving preference over the unabsorbed carried forward loss.
57. From the above, it follows that the assessee is entitled to deduct depreciation or loss whichever is less only in the eventuality when in a given year there is loss as well as depreciation. In such a case, the lesser of the amounts will be allowed to be deducted as per the provisions of the Income-tax Act. In case there is profit in a year, but after adjustment of depreciation, it result in loss, no adjustment in the book profit under section 115J can be allowed.
58. Now, we may refer to the view expressed by the Special Bench of the Tribunal. The Special Bench followed the computation of income under the Companies Act. According to the Tribunal, the company can declare dividends only after setting off depreciation. It can also declare dividends even if there was past losses still remaining to be set off. The basis for this distinction is that loss is taken to be a charge on the capital, while depreciation is taken to be a charge on the profits. It was observed that first proviso, clause (b) under section 205 (1) itself starts with a phrase "if the company has incurred any loss in any previous financial year", which means that it refers only to a situation where the net result is a loss after setting off depreciation. In other words, under section 205 (1), first proviso, clause (b), loss means, loss after depreciation and not before depreciation. In other words, if the income of a company in the year 1990-91 is rupees nine lakhs, and if in the previous year, i.e., 1989-90, it had incurred a loss of rupees three lakhs and depreciation is declared at rupees four lakhs, the net loss should be arrived at after depreciation. The Special Bench observed that : "In the illustration above, it is the contention of the Revenue that the fifth situation will not be a case of loss and no deduction should be given. This view is obviously untenable, because the fifth situation is also a case where the company has incurred a loss being the net result of the operation. If we consider otherwise by referring only to the loss before depreciation, then the profit and loss account itself will not be in conformity with the provisions of the Companies Act because the deduction of depreciation before arriving at the net result is mandatory." It was also observed that : "In the last situation, the assessee will be entitled to the deduction of unabsorbed depreciation of Rs. (-) 2 lakhs only which is the net result, even though the depreciation actually charged was Rs. (-) 3 lakhs. This is because the profit of one lakh would have absorbed part of the depreciation and only the unabsorbed depreciation would be allowed as a deduction. It is only when the profit of the earlier year is enough to wipe out the depreciation that there will be no deduction under that section from the current profits before declaring dividend... Since business loss is always understood to have to come out of capital and since depreciation is always understood as a charge on the profit, the basis that the phrase 'loss or depreciation, whichever is less' must refer to the resultant loss alone, becomes meaningful." The Special Bench further observed that : "..... Consequently, the deduction claimed by the assessee cannot be disallowed, only because there was a profit before depreciation in the earlier years, when the net result is a loss. Since section 205 (1), first proviso, clause (b), itself applies only to a situation where the net result is a loss on the earlier year, the Revenue cannot deny the deduction of the unabsorbed depreciation of the earlier years which is worked out by the phrase 'loss or depreciation whichever is less'. It is only the unabsorbed loss other than depreciation which can be ignored as such loss is to be treated as a capital loss".
59. We have already pointed out that once a provision is borrowed from one enactment and incorporated into anther enactment, the interpretation of the provision under the parent enactment is irrelevant and the borrowed provision has to be interpreted in accordance with the provisions of the latter, namely, borrowing enactment. Therefore, the interpretation of "loss" and "depreciation" for the purpose of declaring dividend under the Companies Act, 1956, is irrelevant and their interpretation under clause (iv) of Explanation to section 115J of the Act should be in accordance with the provisions of the Income-tax Act. Further, the Special Bench had failed to take note of the fact that the unabsorbed loss can be set off under section 72 of the Income-tax Act only against the profits and gains of business and not from the income under any other head, whereas the unabsorbed depreciation can be set off against the income under any other head. The above distinction makes all the difference for the purpose of interpreting "loss" as against "depreciation". For instance, in a particular year, carried forward unabsorbed business loss is Rs. 4 lakhs and profit of Rs. 4 lakhs from immovable property and the depreciation is declared at Rs. 2 lakhs. Since the carried forward unabsorbed business loss cannot be set off against the income from the immovable property, it remains as it is, whereas depreciation can be set off against the profits from out of the immovable property the resultant figure would still be profit of Rs. 2 lakhs. Therefore, Rs. 2 lakhs will remain as profit. Consequently, clause (iv) under the Explanation to section 115J is not applicable to the situation. The Special Bench had failed to take note of the procedure adopted and the limitations imposed under section 72 of the Act for the purpose of carrying forward unabsorbed loss and carrying forward unabsorbed depreciation while adopting the procedure under the Companies Act. It may be that under the Companies Act, the "unabsorbed depreciation" may be included in the "unabsorbed loss" i.e., for the purpose of declaring the net loss or net profits. Therefore, the view taken by the Special Bench is contrary to the provisions of the Income-tax Act.
60. We may point out that as far as the Income-tax Act is concerned, "unabsorbed loss" need not always include "unabsorbed depreciation" or current depreciation. Both the losses, unabsorbed loss, current depreciation and unabsorbed depreciation have been dealt with under Income-tax Act distinctly while adjusting the income. Therefore, the finding of the Special Bench that loss includes unabsorbed depreciation was contrary to the provisions of the Income-tax Act. The reliance placed by the Special Bench on the observations of the Supreme Court in Garden Silk Weaving Factory v. CIT is misplaced. Further, the judgment in Garden Silk Weaving Factory is by a Bench consisting of two judges, Mr. Justice S. Ranganathan and Mr. Justice K. Ramaswamy, whereas the judgment in CIT v. Mother India Refrigeration Industries P. Ltd. is by three judges, Mr. Justice Tulzapurkar, Mr. Justice Sabyasachi Mukharji and Mr. Justice Ranganath Misra. Therefore, the view expressed by a larger Bench of the Supreme Court, viz., in Mother India Refrigeration's case , preferable to the view expressed by the Bench in Garden Silk Weaving Factory's case .
61. We may also refer to the facts in Garden Silk Weaving Factory's case . The assessee, Messrs. Garden Silk Weaving Factory, is a registered firm. For the assessment year in question, it returned a total income of Rs. 3,94,483 and provisional assessment under section 141 of the Act was made accepting the income returned. Subsequently, the Income-tax Officer found that, for the assessment year in the question, the assessee had made an income of Rs. 11,82,056, but deducted there from three figures aggregating to Rs. 7,87,573 to arrive at the net income of Rs. 3,94,433, which had been returned and accepted. These three figures comprised, (1) unabsorbed depreciation Rs. 1,59,181. (2) unabsorbed development rebate Rs. 2,79,150 and (3) unabsorbed business loss Rs. 3,49,242, totaling Rs. 7,87,573. These figures were figures carried over from the previous year for the assessment year 1967-68. The Income-tax Officer was of the opinion that the sum of Rs. 1,59,181. (which represented the amount of unabsorbed depreciation relating to the assessment year 1967-68) and the amount of Rs. 3,49,242 (which represented the unabsorbed loss pertaining to the assessment year 1967-68) could not be carried forward. Therefore, he added back the sum of Rs. 5,08,423 to the returned income for determining the total income for the assessment year 1968-69. The matter went up to the Supreme Court. The question that arose for consideration before the Supreme Court was whether rejection of the claim of the assessee to carry forward the business loss in the hands of firm by the Department was justified. On a consideration of the provisions relating to the assessment of registered firms and unregistered firms, rejecting the contention of learned counsel for the assessee that these provisions under sections 182 and 67 of the Act talk only of "loss" and that to take this expression as including "unabsorbed depreciation" as well will obliterate the distinction in the treatment meted out to these as separate items by section 32 (2) and section 72 (2) and (3), it was held that this argument was misconceived. According to the learned judges, "unabsorbed depreciation" is indeed a part of the "loss". This is so because, in the first place, "depreciation" is a normal outgoing, though in a sense notional, which has to be debited in the computation of the profits of a business on commercial principles (quite apart from statute) and it is difficult to see why, when such deduction yields a negative figure of profits, it cannot be a "loss" as generally understood". It was also held that ".... if it is treated as a genus totally different from a "loss", there is no statutory provision that will permit its adjustment against other business income - implicit in section 32 (2) itself - and against all other income of the assessee as held by the above decisions. We, therefore do not see why "loss" and "unabsorbed depreciation" should be treated as antithetical to, or mutually exclusive of, each other".
62. In making the above observations, the learned judges have not referred to the distinction maintained by the Income-tax Act between "carried forward unabsorbed loss" and "unabsorbed depreciation". Further, the judgment relates to the assessment of a registered partnership firm. In view of this, we are of the opinion that the judgment in Garden Silk Weaving Factory's case is not relevant to the facts of the present case.
63. We may now refer to the arguments advanced by learned counsel and also the written submissions made by them.
64. Sri S. Ravi, learned counsel appearing for the assessees in Writ Petitions Nos. 6102 and 6141 of 1993, submitted that "depreciation" like any other expenditure which is deductible for the purpose of computation of profits, is also an expenditure of the same character as any other expenditure. He relied on the judgment of the Karnataka High Court in CIT v. Society of the Sisters of St. Anne , wherein it was held that (at page 32) :
"If depreciation is not provided for, the books will not contain a true record of revenue or capital. If the asset were hired instead of purchased, the hiring fee would be charged against the profits having been purchased, the asset is, in effect, then hired by capital to revenue, and true profit cannot be ascertained until a suitable charge for the use of the asset has been made. Moreover, unless provision is made for depreciation, the balance-sheet will not present a true and fair view of the state of affairs assets should be shown at a figure which represents that part of their value on acquisition, which has not yet expired."
65. Learned counsel also referred to a judgment of the Calcutta High Court in CIT v. Indian Jute Mills Association , wherein it was held that "depreciation claimed shall include the expenditure incurred". He also relied upon the judgment of the Supreme Court in [1975] 99 ITR 120 (sic) and submitted that depreciation is an item of expenditure much like any other items of expenditure for the purpose of computing income and "income" includes "loss". Therefore, according to him, even for the purpose of computing "loss", depreciation has to be included. Consequently, loss includes depreciation. He also relied on the judgment of the Supreme Court in Garden Silk Weaving Factory's case . Counsel further submits that under the Companies Act, the gross profits arrived at are subjected to various deductions for the purpose of computation of the net profit, depreciation being one such. Therefore, under the Companies Act, depreciation will have to be deducted for the purpose of computation of the profit or losses. He submits further that section 205 of the Companies Act contemplates comparison between loss which is inclusive of depreciation (sic). According to him, the concept of unabsorbed depreciation and carried forward loss is totally alien under the provisions of the Companies Act. Under the Companies Act, the profit and loss account is annualised. The net result of trading and/or manufacturing is determined by comparing the position as at the beginning of the year and as at the end of the year. The results of one year have no relevance for computing the results of the next and succeeding years. It is under these circumstances that section 205 comes into the picture to ensure that a company which has suffered losses in earlier years, whether on account of depreciation or otherwise, without providing for such loss or depreciation does not declare dividend in a subsequent year. It is by virtue of section 205 (1), proviso (b), that the concept of the earlier year's depreciation is introduced into the Companies Act. Learned counsel therefore submits that what section 205 contemplates is comparison between loss which is inclusive of depreciation (sic). Learned counsel also referred to the commentaries of learned authors Sri Kanga and Sri Palkhivala criticising the provision of section 115J of the Act. There cannot be any dispute that depreciation is a part of notional expenditure.
66. There cannot also be any dispute that depreciation is included in the income for the purpose of deduction. The fundamental difference between "unabsorbed depreciation" and "unabsorbed loss" has to be kept in mind before interpreting section 115J of the Act and the procedure adopted under the Companies Act for the purpose of declaring the net profits. Therefore, we are unable to accede to the contentions raised by learned counsel for the assessees. We have earlier elaborately dealt with the reason for holding that the view expressed by the Special Bench is not in accordance with the provisions of Income-tax Act. Therefore, it is not necessary for us, at this stage, once again to deal with the contentions of Mr. Ravi.
67. Mr. Ratnakar, learned counsel appearing for the assessee in W. P. No. 5408 of 1993, raised the following propositions of law :
"1. Section 205 (1) deals with deduction of depreciation before declaration of dividend. Clause (b) of the proviso to sub-section (1) of section 205 merely provides that the unabsorbed portion of the depreciation provided is to be deducted. There is no surplusage or redundancy in any of the words in clause (b) and they all read together to mean 'unabsorbed depreciation.
2. Section 115J is by itself a self-contained section and should be read independently of the provisions of the Income-tax Act. Clause (iv) of the Explanation to sub-section (1A) of section 115J should be given the same meaning as it carries in the parent Act which is the Companies Act from where it was borrowed.
3. Even if the other provisions of the Income-tax Act are made applicable to the said clause (iv) the 'loss' spoken of under the Income-tax Act always includes 'unabsorbed depreciation' and these two are not mutually exclusive of each other.
4. The treatment meted out to unabsorbed depreciation by section 32 (2) and sections 72 (2) and (3) will not obliterate the general concept that 'loss' includes 'unabsorbed depreciation. The segregation of loss into the components 'business loss excluding unabsorbed depreciation' and 'unabsorbed depreciation' is only for the limited purpose of carry forward and set off of business loss and no further.
5. In the event of any ambiguity or controversy in the matter of reconciling the provisions of clause (iv) to Explanation to section 115J (1) with the remaining provisions of the Income-tax Act, a beneficial interpretation be given to clause (iv) being a provision granting relief to the taxpayer."
68. We have already dealt with the above propositions of law raised by learned counsel in the earlier paragraphs of the judgment. If the argument of learned counsel that the segregation of loss into the components "business loss excluding unabsorbed depreciation" and "unabsorbed depreciation" is only for the limited purpose of carry forward and set off of business loss and no further, is accepted, then, it would obliterate the very provisions of the Income-tax Act itself. It would amount to amending clause (iv) to Explanation under section 115J of the Act by addition of the words "loss including unabsorbed depreciation" which would amount to legislation by judicial interpretation. We have also expressed the view that the computation of profit and loss under the Companies Act for the purpose of declaring dividend cannot be adopted for the purpose of computing the taxable income under section 115J of the Income-tax Act. The purpose of computation of profit and loss under the Companies Act, 1956, is different from the purpose of computing the income under the Income-tax Act, 1961. We have given our reasons for this and it is not necessary for us to repeat them once again to deal with the above propositions of law.
69. In the view we have taken, we agree with learned standing counsel for the Department, Sri S. R. Ashok, that computation to be made for the purpose of declaring dividend under the Companies Act cannot be adopted for the purpose of computing taxable income under the provisions of the Income-tax Act and that for the purpose of section 115J of the Act, "loss" does not include "unabsorbed depreciation".
70. The reference made by the Tribunal is answered in favour of the Department and against the assessee. Consequently, the writ petitions are allowed. No costs.