TMI Blog1998 (8) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... he relevant accounting year was in accordance with Parts II and III of Schedule VI to the Companies Act, 1956, as required under section 115J of the Income-tax Act, 1961 ? (i) Whether, on the facts and in the circumstances of the case, it is mandatory on the part of the company, to provide for the arrears of depreciation (in respect of additional shifts in view of Schedule XIV to the Companies Act coming into force with effect from April 2, 1987), if it was not originally provided in the earlier years ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that-- (i) the entire business of the assessee-company including the earning of dividend income is eligible business within the meaning of sub-section (2) of section 32AB of the Income-tax Act, 1961 ? (ii) the dividend income amounting to Rs. 1,51,89,760 should be included in computing the profits of the eligible business under sub-section (3) of section 32AB of the Income-tax Act ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that -- (i) in computing 20 per cent. of the eligible profit, the income from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a public limited company. It is engaged in the business of manufacture and sale of tyres and tubes. For the assessment year 1988-89, the assessee filed its return of income on June 29, 1988. The assessee computed the book profits for the purpose of section 115J of the Act at Rs. 69,94,983 and 30 per cent. of the above was shown at Rs. 20,98,495. For arriving at the said figure, the assessee had shown net profit as per the profit and loss account at Rs. 69,91,306 to which it added provision for income-tax Rs. 16,00,000 and deducted two sums of Rs. 15,44,122 and Rs. 52,201 representing the amount transferred from capital reserve adjusted against depreciation and interest on post office savings bank account exempt under section 10(15)(i) and Chapter III, respectively. The assessing authority noted that the assessee, in arriving at the net profit of Rs. 69,91,306, made a deduction of Rs. 13,66,39,051 by way of arrears of depreciation. The deduction of Rs. 13,66,39,051 representing the arrears of depreciation, according to the assessing authority, was not in accordance with the provisions of Part II and Part III of the Sixth Schedule to the Companies Act, 1956. According to the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Explanation to section 115J and directed the assessing authority to set off the business loss or depreciation whichever is less in accordance with the provisions of section 205(1)(b) of the Companies Act for arriving at the book profit. He also directed that this amount has to be ascertained from the profit and loss account of the company from the very beginning and lesser amount of loss or depreciation has to be deducted from the gross amount. The assessee, not being satisfied with the above, filed further appeal before the Income-tax Appellate Tribunal, Cochin Bench. The Tribunal accepted the contentions of the assessee that for arriving at the net profit for the purpose of section 115J prior year's depreciation has necessarily to be deducted from the current year's profit, as otherwise, the profit and loss account will not reflect the true financial position of the company. The Appellate Tribunal accordingly held that the assessee was perfectly justified in deducting the sum of Rs. 13,66,39,051 from the current year's profit. The Tribunal further held that in a case where net profit is arrived at in the profit and loss account after deducting the prior year's deprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss account in the current year is a necessary requirement in assessing its impact on the current profits. A. S. 5 issued by the I. C. A. I. in November, 1982, also provides that prior period items representing as material charges or credits which arise in the current period should be reflected in the profit and loss account of the current year. Non-charging of depreciation in the earlier years can, at the worst, be viewed as error or omission, and the same could be charged on a provision being made therefor in the profit and loss account of the current year. The only condition is that the fact must be disclosed or highlighted in the accounts. When the Revenue emphasised sub-clause (a) of para. 7(2) of Part III they overlooked sub clause (b) of the same para. which is wider in its import and inclusive in content. The prior period expenses or income would fall under sub-clause (b) as material features affecting the accounts. A cumulative reading of sub-clauses (a) and (-b) of para. 7(2) of Part III will show that arrears of depreciation, even if it is considered as a prior period expenditure, will have its natural accommodation in the profit and loss account of the current year. (6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax Appellate Tribunal was not justified in holding that the net profit has to be arrived at after adjusting the prior year's depreciation and that clause (iii) of the Explanation to section 115J has no relevance in a case where net profit has been arrived at after deducting the prior year's depreciation not provided for in the earlier year's profit and loss account. Learned counsel also submitted that section 115J incorporates only the provisions of Parts I and II of the Sixth Schedule of the Companies Act for the preparation of the profit and loss account and also the provisions of clause (b) of the proviso to sub-section (1) of section 205 of the Companies Act. According to learned counsel, these are the only two provisions of the Companies Act which are relevant to be considered in the application of section 115J of the Act. According to him, this is a case of legislation by incorporation and once certain provisions of the Companies Act are incorporated in section 115J of the Income-tax Act for the purpose of the assessment under the Act, the other provisions of the Companies Act have no application and that the provisions of the Companies Act cannot be looked into for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of certain companies. It is contended that the Tribunal has erroneously assumed that the provisions of the Companies Act other than what is incorporated in the Explanation are also applicable for the fixation of the "book profit" for the purposes of section 115J. The sum and substance of the argument of learned counsel for the Revenue is that in arriving at the net profit the assessee cannot deduct the prior year's depreciation not provided for in the earlier year's profit and loss account and that the same cannot be allowed to be adjusted in arriving at the book profit. Learned counsel canvassed for acceptance the computation of net profit/book profit made by the assessing authority and affirmed by the first appellate authority. Shri Sarangan, learned counsel appearing for the assessee, on the other hand, sought to support the order of the Income-tax Appellate Tribunal holding that the assessee is entitled to adjust the amount of depreciation not provided for in the profit and loss account of the earlier years since the assessee is entitled to compute the depreciation for the earlier years taking into account the extra shift allowance also particularly in view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct from April 2, 1987, by the Companies (Amendment) Act, 1988. Schedule XIV to the Companies Act for the first time provides for the rate of depreciation. It can be seen from Schedule XIV, which has reference to sections 205 and 350 of the said Act, that different rates of depreciation are provided for single shift, double shift and triple shift depending on the nature of the assets. Under single shift, it provides for written down value method as well as the straightline method. For double shift and triple shift also the same method is provided. According to learned counsel for the assessee, there was no taboo for claiming depreciation for single shift, double shift and triple shift in addition to the straightline method. According to him, the view taken by the assessee-company that it is entitled to claim depreciation on extra shift allowance in addition to the straightline method was supported by the bill, that this Schedule is given effect to with retrospective effect from April 2, 1987, and, therefore, even the Schedule applied to the accounting period relevant to the assessment year in question and that even assuming that the Schedule is not applicable, the assessee was perfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 1956, and clause (b) of the first proviso to section 205(1) of the said Act in the Explanation can be considered only as a legislation by reference and, therefore, all the provisions of the Companies Act are applicable for understanding the said provisions. He further submitted that the expression "loss" used in clause (iii) must be understood in the context of the provisions of the Companies Act and not under the provisions of the Income-tax Act. He further submitted that the decision of the Andhra Pradesh High Court in V. V. Trans-Investments Pvt. Ltd. v. CIT [1994] 207 ITR 508 is distinguishable. The reasons stated are that, (1) in the decided case there was no provision for arrears of depreciation in the profit and loss account, and (2) the question of what is "net profit" was not in issue in that case. In order to appreciate the merits of the rival submissions made by counsel appearing on either side, it is necessary to refer to the provisions of section 115J of the Act, the relevant provisions of the Companies Act and the background for the introduction of this special provision in the Act. Section 115J of the Act as it stood at the relevant time reads as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsection (1) of section 72 or section 73 or section 74 or sub-section (3) of section 74A or sub-section (3) of section 80J." Before proceeding to consider the scope and ambit of section 115J of the Act, it is necessary at this stage to examine the background of the said provision. Before the introduction of section 115J the position was that the income chargeable to tax under the head "Profits and gains of business or profession" shall be computed in accordance with the provisions contained in sections 30 to 43C. This was the position with respect to every person who is subjected to be charged under section 4 of the Act. The Legislature, by the Finance Act, 1983, introduced a new chapter-Chapter VI-B-containing only one provision-section 80VVA-imposing restriction on certain deductions in the case of companies, with effect from April 1, 1984. Later, by the Finance Act, 1987, the said Chapter was deleted with effect from April 1, 1988. Simultaneously, in the Finance Act, 1987, itself a new Chapter-Chapter XII-B-containing only one section-section 115J-- was inserted. So, as on the date of introduction of section 115J, i.e., from April 1, 1988 (ignoring section 90VVA). a company, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. of the book profit, then section 115J is attracted and the total income of the company shall be deemed to be thirty per cent. of the book profit. In the instant case, there is no dispute with regard to the application of section 115J of the Act, for, even as per the computation made by the assessee the total income computed in accordance With the normal provisions of the Act is less than thirty per cent. of its book profit as computed by the assessee. The only dispute in this case is regarding the amount of book profit. As already stated, the Explanation to sub-section (1) defines what "book profit" is. It means the 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 (I of 1956) with the adjustments provided in clauses (a) to (f) and (i) to (iii) of the Explanation. Amounts mentioned in clauses (a) to (f) have to be added to the net profit arrived at as above if the said amounts had been debited in the profit and loss account and the amounts mentioned in clauses (i) to (iii) shall be debited from the net profit if the said amounts are credited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or receipts and debits or expenses in respect of non-recurring transactions or transactions of an exceptional nature. 3. The profit and loss account shall set out the various items relating to the income and expenditure of the company arranged under the most convenient heads ; and in particular, shall disclose the following information in respect of the period covered by the account--... (iv) the amount provided for depreciation, renewals or diminution in value of fixed assets. If such provision is not made by means of a depreciation charge, the method adopted for making such provision. If no provision is made for depreciation, the fact that no provision has been made shall be stated and the quantum of arrears of depreciation computed in accordance with section 205(2) of the Act shall be disclosed by way of a note... 4A. The profit and loss account shall contain or give by way of a note a statement showing the computation of net profit in accordance with section 349 of the Act with relevant details of the calculation of the commissions payable by way of percentage of such profits to the directors (including managing director) or manager, (if any)... 6. (1) Except in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foresaid, comply with the requirements of Part II of Schedule VI so far as they are applicable thereto. Sub-section (5) of the said section, inter alia, provides that the profit and loss account of a company shall not be treated as not disclosing a true and fair view of the state of affairs of the company, merely by reason of the fact that they do not disclose any matters which are not required to be disclosed by virtue of the provisions contained in Schedule VI or by virtue of a notification issued under sub-section (3) or an order issued under sub-section (4). Now coming to Part II of the Sixth Schedule, clause 2 provides that the profit and loss account shall be so made out as clearly to disclose the result of the working of the company during the period covered by the account and it shall also disclose every material feature regarding income and expenditure debited or credited. Clause 3 provides that the profit and loss account shall set out the various items relating to the income and expenditure of the company arranged under the most convenient heads and in particular, shall disclose the information in respect of the period covered by the account. One such information rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approved by the Central Government. It has to be noted that the different modes provided under sub-section (2) are optional and it is for the assessee to choose either the one or the other. If the assessee chooses to opt the mode provided under clause (a), then the ascertainment of amount of depreciation is as provided in section 350. Section 350, it must be noted, provides that the amount of depreciation to be deducted in pursuance of clause (k) of sub-section (4) of section 349 shall be the amount calculated with reference to the written down value of the assets as shown in the books of the company at the end of the financial year at the commencement of this Act or immediately thereafter and at the end of each such financial year. So, in respect of an assessee who has opted for the mode of computation provided under clause (a) of sub-section (2), the amount of depreciation has to be calculated with reference to the written down value of the assets. In this context, it has also to be noted that prior to the amendment of the Companies Act made in 1988, whereby Schedule XIV was inserted and consequent amendment was made to section 350 to the effect that "at the rate specified in Sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a note. A cumulative reading of the aforesaid provisions of Part II would show that it is not at all necessary, even if a provision for depreciation is made in the profit and loss account, to make depreciation a charge against the profits of that year. It would further show that it is not obligatory that a provision is made for depreciation. What is required is only to show the method adopted for making the provision for depreciation and in a case where no provision is made, to state so and to show the quantum of arrears of depreciation computed in accordance with section 205(2) of the said Act by way of a note. Though Part II of the Sixth Schedule deals with the preparation of the profit and loss account, we are more concerned with the net profit as per the profit and loss account prepared in accordance with Part II. In other words, we are more concerned with the items which can be legitimately made a charge against the profits in the profit and loss account. We have already pointed out that under clause 2 of Part 11 it is the result of the working of the company during the period covered by the account that is material. In that context, clause 3(iv), which refers to "the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view that the profit and loss account prepared in accordance with the provisions of Parts II and III mentioned above do not contemplate making of a provision for arrears of depreciation either separately or along with the current year's depreciation to be a charge against the profit of that year. Notwithstanding the above understanding of the provisions for arriving at the net profit contemplated in the first part of the Explanation, we will deal with the contention of the assessee regarding the adjustment of arrear depreciation worked out by the assessee pursuant to the introduction of Schedule XIV to the Companies Act with effect from April 2, 1987, based on the Guidance Notes on accounting for depreciation in companies issued by the Institute of Chartered Accountants of India, New Delhi (annexures E and G), and the communication issued by the Department of Company Affairs on October 21, 1991 (annexure-D-2). As noticed earlier, section 211 of the Companies Act providing for the form and contents of balance-sheet and profit and loss account, sub-sections (1) and (2) thereof state that the said documents shall give a "true and fair view" of the profit or loss of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be entitled to deprecation and development rebate with reference to such interest also. The Supreme Court resolved the said question by drawing guidance from recognised normal accountancy practices prevalent in commerce and industry and the principles explained in Accountancy Books including the guidelines issued by the I.C.A.I., on the audit of accounts. The Supreme Court resorted to the above in the absence of a definition of the expression "actual cost" in the 1922 Act. It is by drawing analogy from the said decision, the assessee submitted, that in the absence of a definition of the expression "true and fair view", the assessee was perfectly justified in relying on the Guidance Note issued by the I.C.A.I. for its members who are in charge of auditing and certifying company accounts each year. In this case, the assessee mainly relies on AS-6 regarding depreciation in accounting issued by the I.C.A.I. AS-6, paragraph 3.1, states that "depreciation" is a measure of the wearing out, consumption or other loss of value of depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes, that depreciation is allocated so as to charge a fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dance Note, AS-5 and AS-6 particularly from the paragraphs mentioned above that prior year depreciation can be separately provided in the profit and loss account and can be made a charge against the profit of the year along with the current year's. depreciation. The reason stated is that this is required to have a true and fair account of the financial position of the company for the use of the public. But it is relevant to note that this accounting policy can be adopted only in a case where paragraph 22 of AS-6 mentioned above is attracted. Regarding the position as to whether a company, which follows the straightline method specified in section 205(2)(b) of the Companies Act, can also provide for depreciation in respect of extra or multiple shift allowance, the Guidance Note issued by the I.C.A.I. is not very clear. It is stated in the Guidance Note that it has come to the notice of the council of the I.C.A.I. that certain companies are not providing depreciation in respect of extra or multiple shift allowance and that some companies are writing back depreciation in respect of extra or multiple shift allowance provided in the past years under section 205(2)(b) of the Companies Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it of that year. It has not been brought to our notice any provision in the Companies Act authorising the Company Law Board to give any opinion in relation to any individual case or otherwise in the nature given in annexure-D2. We also could not see any provision in the Companies Act enabling the Company Law Board to issue such a communication. That apart, there is absolutely nothing to show that the Company Law Board had considered the relevant provisions of the Companies Act regarding the preparation of balance-sheet in accordance with the provisions of Parts II and III of the said Act. Except to say that the computation of net profit by charging arrears of depreciation for the earlier years also in the profit and loss account of the company for the period ended October 31, 1987, is in accordance with the provisions of section 205 of the Companies Act, 1956, read with Parts II and III of the Sixth Schedule to the Companies Act, absolutely no reasons for arriving at the said conclusion had been stated. We are of the view that in the absence of a statutory provision enabling the Company Law Board to issue such directions, any opinion expressed by the Company Law Board cannot have a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the date of addition ; (c) Clarification issued in circular dated May 21, 1986, by the Department of Company Affairs in respect of application of the revised rates of depreciation under the amended Income-tax Rules in respect of various assets ; (d) Reclassification of certain items of plant under the main head 'Plant and machinery'. A sum of Rs. 1,267.60 lakhs representing depreciation provided in the accounts for earlier years in excess of the amount required to be provided as recomputed on the above basis has been adjusted in arriving at the depreciation relating to earlier years debited to the profit and loss account. Had the company followed the practice adopted in previous years the charge of depreciation would have been higher by Rs. 31.27 lakhs. The extra shift depreciation not provided as per (a) above for the period up to October 31, 1986, amounts to Rs. 1,948 lakhs including Rs. 127 lakhs for the year." It can be seen further from the letter dated September 24, 1991 (annexure D-1), sent by the assessee-company to the Secretary, Department of Company Affairs (extracted in the appellate order of the Tribunal at pages 60 and 61 of the paper book), that while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Research Committee of the I.C.A.I. to the effect that where for the purposes of section 350 or section 205(2) income-tax rates are adopted, the rates to be considered are the normal rates together with the allowance for extra shift working. It must be noted that the reference to section 205(2) there can only be with reference to clause (a) thereof, which refers to section 350 and not with respect to clause (b) or clause (c) of sub-section (2) of section 205. We will also consider the significance of the amendment to the Companies Act particularly section 350 and the introduction of Schedule XIV for the said purpose. It can be seen from Schedule XIV itself that there is reference to sections 205 and 350. That is for the reason that clause (a) of sub-section (2) of section 205 requires the application of Schedule XIV in view of section 350. In this context, it has to be noted that prior to the amendment of section 350 of the Companies Act, 1956, by the Companies (Amendment) Act, 1988, with effect from June 15, 1988, the position was that the rate of depreciation under section 350 was as provided under the Indian Income-tax Act, 1922, and the Rules made thereunder. As per the Ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eciation for the current year was accepted by the authorities from the facts that the sum of Rs. 4,17,20,438 computed as depreciation by the assessee in the profit and loss account is seen accepted by the assessing authority and from the fact that a sum of Rs. 4,00,91,301 is seen deducted which has not been interfered with by the first appellate authority. For these reasons, we are of the view that the guidance notes issued by the I.C.A.I also are of no assistance to the assessee for making deduction of the sum of Rs. 13,66,39,051 in the computation of net profits as per the profit and loss account prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act. Now we will go to the next step in the computation of book profit. As stated earlier in this judgment, the first step under the Explanation to section 1151 is to arrive at the net profit. Once the net profit is arrived at from the profit and loss account prepared in accordance with the provisions of Parts II and III of the Sixth Schedule to the Companies Act, the next step is to make the adjustments provided in clauses (a) to (f) and (i) to (iii) of the said Explanation. The net profit arr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 80VVA specified the provisions regarding various deductions allowable to a company under the Act. This provision itself was enacted, as could be seen from the Budget Speech of the Finance Minister for the financial year 1983-84, with a view to securing that the various deductions in respect of tax concessions admissible under the Income-tax Act did not result in reducing the taxable income of companies to the extent that no tax or only a negligible tax would be payable by profit-making companies. The object and background, under which section 115J came to be enacted, is stated by the Andhra Pradesh High Court in V. V. Trans-Investments (P.) Ltd. v. CIT [1994] 207 ITR 508, at page 532, as follows : "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 profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the profit and loss account prepared in accordance with the provisions of Parts II and III of the Sixth Schedule. It would further appear that it is for that reason that the Legislature wanted to make a deduction of an amount equivalent to the amount of loss or the amount of depreciation, whichever is less, for arriving at the book profit. It is also worthwhile to refer to the observations made by the Delhi High Court in National Thermal Power Corporation Ltd. v. Union of India [1991] 192 ITR 187. That was a case filed under article 226 of the Constitution of India challenging the provisions of section 1151 of the Act. While dismissing the writ petition, justice B. N. Kirpal (as his Lordship then was) observed : "This provision, namely, section 115J, was brought in the statute book in an effort to tax what is commonly known as 'zero tax companies', These are companies which have, in fact, large profits in its books but, for the purpose of the Income-tax Act, by virtue of various deductions which have been claimed, very little taxable income is disclosed. It is in an effort to bring such types of companies within the taxable net that section 115J was inserted by Parliament, W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al year or years which falls or fall after the commencement of the Companies (Amendment) Act, 1960, it shall, before declaring or paying dividend for any financial year provide for such depreciation out of the profits of that financial year or out of the profits of any other previous financial year or years ;" It is to be noted that clause (iii) of the Explanation extracted above shows that the provisions of clause (b) of the first proviso to sub-section (1) of section 205 of the Companies Act, 1956, are made applicable for the purposes of determining the amount of deduction under clause (iii). In other words, the provisions of clause (b) of the first proviso to sub-section (1) of section 205 of the Companies Act, 1956, have been read into clause. (iii), It is necessary, therefore, to consider as to what exactly the Legislature means when it says 'as if the provisions of clause (b) of the first proviso to sub-section (1) of section 205 of the Companies Act, 1956, is applicable'. Does it mean clause (b) in its entirety is to be applied or only to the extent required for effectuating the object of clause (iii) of the Explanation ? Clause (iii) provides for deduction of the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at if the company has not provided for any depreciation for any previous financial year or years which falls or fall after the commencement of the Companies (Amendment) Act, 1960, it shall, before declaring or paying dividend for any financial year, provide for such depreciation out of the profits of that financial year or out of the profits of any other previous financial year or years. From the above it would appear that clause (b) of the first proviso to sub-section (1) of section 205, when it says 'if the company had incurred any loss' and also 'then, the amount of the loss', the expression 'loss' occurring therein can mean only 'loss' excluding 'depreciation', for, clause (a) mentioned above had already provided for depreciation. If the expression 'loss' in clause (b) of the proviso is understood as including depreciation also, then it will result in double deduction of the amount of depreciation for purposes of section 205(1) of the Companies Act. Take the case of the assessee itself. The assessee had provided depreciation for the earlier years only at the SLM rates and did not provide for extra shifts worked. Assume that the assessee was entitled to provide for that also in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o of the view that unless there is 'loss' as understood above in any year, there is no scope for the application of clause (iii) of the Explanation. The view taken by us as above, viz., the expression "loss" used in clause (iii) does not include depreciation, is supported by the decision of the Andhra Pradesh High Court in V. V. Trans-Investments (P.) Ltd. v. CIT [1994] 207 ITR 508. That was a case where the Andhra Pradesh High Court considered the reference along with eight batch of writ petitions challenging the provisions of section 115J. One of the questions referred for the decision of the High Court was as to whether the Appellate Tribunal was justified in law in holding that the "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" ? In that case, the first year of assessment of the company was 1987-88. During that year there was a profit. In the assessment year 1988-89, there was a profit of Rs. 35,79,997 before depreciation and the depreciation debited to the profit and loss account was Rs. 67,75,759. Thus, the net result after adjusting depreciatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "loss" used in Explanation (iii) to section 115J came up for consideration before the Madhya Pradesh High Court also in Bhilai Wires Ltd. v. CIT [1998] 231 ITR 288. The appellant-company in that case filed a return (revised return) with a computation of income under section 115J of the Act showing the book profit at Rs. 8,30,178 and declared the income at 30 per cent. of the above amounting to Rs. 2,49,053. The Assessing Officer did not accept the above computation and determined the book profit at Rs. 23,54,501. The Commissioner of Income-tax (Appeals) affirmed the same but in second appeal the Tribunal accepted the computation made by the assessee relying on the decision of the Tribunal in Surana Steels (P.) Ltd. v. Deputy CIT [1993] 201 ITR 1 (AT). (It must be noted here that the decision mentioned above was also the subject-matter of the decision of the Andhra Pradesh High Court in V. V. Trans-Investments (P.) Ltd.'s case [1994] 207 ITR 508, mentioned earlier). That court, after referring to the scheme of section 115J, clause (iii) thereof, and the provisions of clause (b) of the first proviso to section 205(1) of the Companies Act, 1956, observed that clause (b) of the first p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), of the Income-tax Act that the loss (including depreciation) and depreciation whichever is less, is to be deducted from the current year's book profit. The Assessing Officer interpreted the word "loss" as appears in section 205(1), clause (b), of the first proviso of the Companies Act read with section 115J(1A), Explanation (iv), of the Income-tax Act, as loss excluding depreciation. The Commissioner of Income-tax (Appeals) confirmed the order of the Assessing Officer. The Appellate Tribunal in appeal, relying on the decision of the Andhra Pradesh High Court in V. V. Trans-Investments (P.) Ltd. v. CIT [1994] 207 ITR 508, held that the claim of the assessee regarding allowance of a sum of Rs. 18,15,787 cannot be considered. That is how the question mentioned above has arisen before the High Court. Referring to the provisions of Explanation (iv) to section 115J(1A) and the provisions of section 205(1), clause (b) of the first proviso of the Companies Act, the court observed as follows : "On a reading of these provisions together, it transpired that clause (b) of the first proviso of sub-section (1) of section 205 of the Companies Act has been fictionally incorporated in the Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Madhya Pradesh High Court that they have dissented from the view taken by the Andhra Pradesh High Court in V. V. Trans-Investments (P.) Ltd.'s case [1994] 207 ITR 508, mentioned above to the effect that once the provisions of section 205(1), first proviso, clause (b) has been fictionally incorporated in the Income-tax Act the profit and loss have to be worked out in terms of the Income-tax Act and not under the Companies Act, they have taken the view that the loss and depreciation have to be worked out in terms of the Companies Act. From the conclusion reached by the court it would appear that the question was answered in the affirmative, viz., the Tribunal was right in law in holding that the "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 excluding depreciation. We have already taken the view that the expression "loss" as it appears in section 205(1), first proviso, clause (b), of the Companies Act read with clause (iii) of the Explanation to section 115J of the Income-tax Act, will not take in depreciation. The conclusion reached by the High Court of Andhra Pradesh an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and certain adjustments are provided in the newly inserted section. This amendment will take effect from April 1, 1997, and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years." We refer to the new provision only to show that the said provision is, by and large, similar to the provisions of section 115J itself. The only difference is that the said section has been restructured and certain minor changes are also made. As per subsection (2) of section 115JA, every assessee, being a company, shall, for the purposes of section 115JA, 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. It provides 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 body meeting in accordance with the provisions of section 210 of the Companies Act, 1956. It also provides that where a company has adopted or adopts the financial year under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cordance with section 205(1)(b) of the Companies Act for determining the book profit. This has to be ascertained from the profit and loss account of the company from the very beginning as the company was incorporated only after the introduction of the Companies (Amendment) Act. After ascertaining the business loss and depreciation separately, the Assessing Officer should give deduction on lesser of the two amounts and arrive at the profit for determining the total income chargeable to tax as contemplated in section 115J. Therefore, this part of the order requires to be set aside at this stage. The Assessing Officer will determine the tax accordingly." This portion of the order has not been challenged by the Revenue before the Tribunal and, therefore, it has become final. This is a matter for the Assessing Officer to consider when he gives effect to the consequential order of the Tribunal, if it has not already been done earlier. The next question is regarding the claim made by the assessee under section 32AB of the Act. Questions Nos. 2 and 3 referred by the Tribunal for our opinion in I. T. R. No. 70 of 1994 relate to the said claim. Question No. 2 referred to in I. T. R. No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dustrial undertaking engaged in the manufacture or production of an article. One of the components to be considered for deduction under sub-section (1)(ii) of section 32AB is the profit of eligible business to the extent of 20 per cent. of the same. That profit has to be computed in the manner laid down in sub-section (3) of section 32AB cited supra. We, therefore, conclude that whatever income is earned by the assessee either from its activity of manufacture or production for sale or from other activities such as dealing in shares and earning profits thereon and receiving income on such shares in the interim period as long as they constituted the same business-all will fall under the category of 'eligible business'. The reason is by definition, eligible business, is not confined to manufacture or production. Moreover inter head and intra head adjustments are the cardinal features of computation of income. Further; in the case of the assessee, the accounts have been prepared in accordance with Part II and Part III of the Sixth Schedule to the Companies Act, 1956, as is the mandate in sub-section (3) of section 32AB. From the published profit and loss account prepared in accordance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordance with Part II and Part III of the Sixth Schedule to the Companies Act, subject to such adjustments as have been prescribed therein." It is against these findings of the Tribunal that the three questions mentioned above are referred at the instance of the Revenue. Learned counsel appearing for the Revenue submitted that what the assessee received from the Unit Trust of India was dividend, that dividends are assessable under "Other sources", that the heads of income prescribed in section 14 of the Act are mutually exclusive and that once a particular receipt falls under a particular head of income it cannot be held that it was part of income from another head. Counsel submitted that in the instant case, the dividend income received by the assessee from the Unit Trust of India was returned under the head "Other sources" and that it was assessed also under "Other sources". On that basis it is contended that the said income cannot be treated as income from an eligible business within the meaning of section 32AB(2) of the Act. It is further contended that since dividend income does not fall under the head "Income from business or profession", the assessing authority and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chase of any new ship, new aircraft, new machinery or plant, without depositing any amount in the deposit account under clause (a), in accordance with, and for the purposes specified in, a scheme (hereafter in this section referred to as the scheme) to be framed by the Central Government, or if the assessee is carrying on the business of growing and manufacturing tea in India, to be approved in this behalf of the tea board, the assessee shall be allowed a deduction (such deduction being allowed before the loss, if any, brought forward from earlier years is set off under section 72) of-- (i) a sum equal to the amount, or the aggregate of the amounts, so deposited and any amount so utilised ; or (ii) a sum equal to twenty per cent. of the profits of eligible business or profession as computed in the accounts of the assessee audited in accordance with sub-section (5), whichever is less : Provided that where such assessee is a firm, or any association of persons or any body of individuals, the deduction under this section shall not be allowed in the computation of the income of any partner, or, as the case may be, any member, of such firm, association of persons or body of indivi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd provision therefor ; (iii) the amount of surtax paid or payable under the Companies (Profits) Surtax Act, 1964 (7 of 1964) ; (iv) the amounts carried to any reserves, by whatever name called (v) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities ; (vi) the amount by way of provision for losses of subsidiary companies ; and (vii) the amount or amounts of dividends paid or proposed, if any debited to the profit and loss account ; and as reduced by any amount or amounts withdrawn from reserves or provisions, if such amounts are credited to the profit and loss account ; and (b) in a case where such separate accounts are not maintained or are not available, be such amount which bears to the total profits of the business or profession of the assessee after allowing depreciation in accordance with the provisions of sub-section (1) of section 32, the same proportion as the total sales, turnover or gross receipts of the eligible business or profession bear to the total sales, turnover or gross receipts of the business or profession carried on by the assessee." In this context, it will be useful to refer to Circula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintained, an amount arrived at after deducting an amount equal to the depreciation computed in accordance with the provision of section 32(1) of the Income-tax Act from the amount of profits computed in accordance with the requirements of Parts II and III of the Sixth Schedule to the Companies Act, 1956, as increased by an amount equal to the depreciation, if any, debited in the audited profit and loss account. This implies that the profit has to be computed, taking into account only the depreciation for the current year, as admissible under the Income-tax Act. Further, Part II of the Sixth Schedule to the Companies Act lays down the requirements as to profit and loss account. These requirements, as per the provisions of section 32AB(3) of the Income-tax Act, will be applicable in the cases of corporate as well as non-corporate assessees." As per section 32AB of the Act, where an assessee, whose total income includes income chargeable to tax under the head "Profits and gains of business or profession", has, out of such income, utilised any amount during the previous year for the purchase of new machinery or plant, the assessee shall be allowed a deduction of a sum equal to tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s" means business other than those provided in sub-clauses (a) and (b) thereof. Admittedly the activity of purchase and sale of units of the Unit Trust of India does not fall under the said two sub-clauses. Therefore, it has to be held that the business of buying and selling of units of the Unit Trust of India is an eligible business and the profits thereof qualify for inclusion for determining the quantum of deduction available under the said sub-section. In this context, it is relevant to note that the Department has no case that the activity of the assessee-company by way of purchase and sale of units of the Unit Trust of India is not a business activity or that the income by way of dividend or profits on the sale of units is not business income. In fact, the Tribunal has noted in paragraph 39 of the appellate order that "there is no dispute that the business of the assessee falls within the meaning of eligible business. The dispute is only about the computation of profits of such business." In other words, the case of the Department is that since dividend income has been returned by the assessee as income from other sources and since the said income was assessed under other sou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such. As already stated, the relevance of income chargeable to tax under the head "Income from business" comes in only in the context of the utilisation of the income out of the total income of the previous year for the purchase of new machinery/plant. It has no relevance when it comes to the deduction part. There, the only relevance is to "profits of eligible business". The expression "eligible business" is also defined, If the legislative intention, as contended by the Department, is to allow deduction of a sum equal to twenty per cent. of the income chargeable to tax under the head "Income from business", the Legislature could have specifically said so, in which case it was not at all necessary to use the expressions "profits of eligible business" or to give a definition of "eligible business". As already stated by the Tribunal, the expression "chargeable to profits and gains of business" is conspicuous by its absence in section 32AB(1)(ii) or in section 32AB(3). The Department has taken a contention based on the provisions of sub-section (3) of section 32AB that dividend income cannot form part of the profits of eligible business. The Commissioner of Income-tax (Appeals) has al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has raised a specific question as to whether the Tribunal was justified in holding that the assessee's business in the purchase and sale of units and its business in the manufacture and sale of tyres constituted one and the same business and since the Tribunal has referred the question for opinion as directed by this court in O. P. No. 2487 of 1994, we will deal with the same also. Before going into the said question it is necessary to see how it Was considered by the Assessing Officer and by the appellate authorities. The Assessing Officer in the computation of total income under the Act for the year in question treated the entire business of the assessee as one and excluded only the income of Rs. 1,51,89,760 received from the Unit Trust of India. In other words, loss suffered on account of the sale of units, Rs. 22,69,700 and claimed as deduction in the computation of total income was not disallowed. This itself shows that the Assessing Officer had treated the dealing in purchase and sale of units of the Unit Trust of India as "business" and that too as part of the same business. The Commissioner of Income-tax (Appeals) also did not have a case that the said activity of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... since they fall under the same head of income. The test for determining whether two lines of business constitute the same business came up for consideration before the Supreme Court in the context of section 24(2) of the Indian Income-tax Act, 1922, as it stood prior to its amendment in 1955, in CIT v. Prithvi Insurance Co. Ltd. [1967] 63 ITR 632 (SC) and the Supreme Court at page 637 of the said decision observed thus : "A fairly adequate test for determining whether the two constitute the same business is furnished by what Rowlatt J. said in Scales v. George Thompson and Co. Ltd. [1927] 13 TC 83, 89 : 'Was there any interconnection, any interlacing, any interdependence, any unity at all embracing those two businesses ?' That interconnection, interlacing, interdependence and unity are furnished in this case by the existence of common management, common business organisation, common administration, common fund and a common place of business." The Supreme Court again considered the same issue in Produce Exchange Corporation Ltd. v. CIT [1970] 77 ITR 739 (SC). There, the question was as to whether the share business and other business carried on by the appellant-company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies Act and that the unitholder is not a shareholder. It was also contended that the Explanation to section 73 is only concerned with companies carrying on business in the purchase and sale of shares of other companies and that in the absence of a definition of " shares" in the Income-tax Act, the definition of "share" in section 2(46) of the Companies Act applied which means share in the share capital of a company and includes stock except where a distinction between stock and shares is expressed or implied, which is absent in the case of units of the Unit Trust of India. The Commissioner of Income-tax (Appeals) rejected the said contentions stating that the Explanation to section 73 is only a deeming provision and that the Explanation contemplates treatment of certain companies as companies carrying on speculation business to the extent to which the business consists of the purchase and sale of shares and that this has nothing to do with "speculative transactions" defined in section 43(5). Referring to the provisions of section 32 of the Unit Trust of India Act, the Commissioner of Income-tax (Appeals) observed that though it is not specifically mentioned in the said section tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ked." Referring further to the submissions made by counsel appearing for the Revenue with reference to sub-section (3) of section 32 of the said Act, the Tribunal observed that it is in relation to the provisions of sections 193 and 194 of the Income-tax Act, 1961, mentioned in section 32(2) of the Unit Trust of India Act the provisions of sub-section (3) declares that the income distributed by the Unit Trust should be considered as dividend and it should be treated as a company. It is further observed that the fiction created in section 32(3) of the Unit Trust of India Act is limited to the provisions of section 32(1) and (2) and cannot be extended beyond. The Tribunal further held as follows : "A share is a bundle of rights and a shareholder is one who can exercise those rights on his own. One of the rights attaching to shareholders is to participate in the affairs of the company. The right to elect the board of directors and the right to approve the accounts and to vote for the dividend are some of the other rights. No such rights are available to the unitholder, such rights having been perhaps reserved for the initial contributions, such as the Reserve Bank of India, Life ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here the assessee had no income from any other speculation business, shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and it shall be set-off against the profits and gains, if any, of any speculation business carried on by him assessable for that assessment year. The Explanation to section 73 reads as follows : "Where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads 'Interest on securities', 'Income from house property', 'Capital gains' and 'Income from other sources' or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares." The assessing authority, as already stated, has allowed the loss in question to be adjusted against the income chargeable under the head "Business", but the Commissioner of Income-tax (Appeals) dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the Wealth-tax Act, 1957, the Income-tax Act, 1961, the Super Profits Tax Act, 1963, the Companies (Profits) Surtax Act, 1964, or in any other enactment for the time being in force relating to income-tax, supertax or super profits-tax, surtax or any other tax on income, profits or gains (a) the trust shall not be liable to any income-tax, super-tax, super profits tax, surtax or any other tax in respect of any income, profits or gains derived by it from any source ; (a) in the case of an assessee who is not resident in India, being, (i) an individual who is an Indian or a person of Indian origin, or (ii) a Hindu undivided family, there shall not be included in the total income of such assessee, for the purposes of the Income-tax Act, 1961, any income received by such assessee in the previous year in respect of units acquired by such assessee from the trust out of funds in a Non-resident (External) Account maintained with any bank in India or by the remittance of funds in foreign exchange, in accordance, in either case, with the provisions of the Foreign Exchange Regulation Act, 1973, or any rules or orders made thereunder ;... (bb) in the case of an assessee who is not resid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) no deduction of income-tax shall be made by the Trust from the income distributed by it to a unitholder being an individual ; and (c) where in the case of a unitholder, being an individual who is not resident in India, the income in respect of units receivable by him from the trust during the financial year (i) does not exceed seven thousand rupees, no deduction of income-tax shall be made by the Trust from the income distributed by him ; (ii) exceeds seven thousand rupees deduction of income-tax shall be made by the Trust from the whole of the income distributed to him at the rate of fifteen per cent. of such income : Provided that no deduction of income-tax, shall be made by the Trust, were the units in respect of which income is distributed to (i) an individual who is an Indian or a person of Indian origin, or (ii) a Hindu undivided family ; not resident in India, have been acquired from the Trust, out of funds in a Non-resident (External) Account maintained with any bank in India or by the remittance of funds in foreign exchange, in accordance, in either case, with the provisions of the Foreign Exchange Regulation Act, 1973, or any rules or orders made the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the face value of the units sold under a unit scheme and outstanding for the time being, "Unit certificate" is defined to mean a certificate issued to the purchaser of a unit under a unit scheme. "Unitholder" is defined to mean a person for the time being recognised by the trust as the holder of a unit certificate under a unit scheme and "unit scheme" is defined to mean a scheme made under section 21. From the above it is clear that the trust issues the units under a scheme to be framed under section 21 of the Act and the amount received by the issue of these units known as "unit capital" is the funds of the trust under those schemes. Section 32(3) of the Act provides that the income received by a unitholder shall be deemed to be his income by way of dividends. It also provides that the trust shall be deemed to be a company. At this juncture, for a full understanding of the scope of the provisions of section 32(3) of the Unit Trust of India Act, it is necessary to refer to the provisions of the Income-tax Act, 1961 regarding dividend. Section 2(22) of the Act defines "dividend" as follows : "2. In this Act, unless the context otherwise requires,-- (22) 'dividend' includes- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off ; Explanation l.--The expression 'accumulated profits', wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956 ; Explanation 2.--The expression 'accumulated profits' in sub-clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of liquidation, but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place ;" Section 8 of the Act deals with dividend income. It read as follows ; "8. For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creates a fiction for treating the income from units as dividends and the trust as a company, does not provide for deeming the unit as a share. In the absence of such a deeming, a unitholder cannot be treated as a shareholder. Consequently, the definition of "dividend" in section 2(22) of the Act is not attracted, for, as already stated, dividend means any distribution of profits of a company to a shareholder. Section 8 of the Act provides that for the purpose of inclusion in the total income of an assessee, any dividend declared by a company, shall be deemed to be the income of the previous year in which it is so declared. Section 8 also provides that any dividend distributed or paid by a company within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) of clause (22) of section 2, shall be deemed to be the income of the previous year in which it is so distributed or paid. As already stated, section 8 is in two parts, The first part deals with any dividend declared by a company. The second part deals with the income falling within the definition of "dividend" in section 2(22) of the Act. By virtue of the fiction created by sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 32 starts with the expression "subject to the foregoing sub-sections" and then says "for the purposes of the Income-tax Act, 1961, any distribution of income received by a unitholder from the trust shall be deemed to be his income by way of dividends and that the Trust shall be deemed to be a company". Thus, it is clear that the fiction created by sub-section (3) of section 32 is created only for the purposes of assessment of dividend income under the Act and for deduction of tax at source. In other words, the legal fiction created by section 32(3) of the said Act cannot be carried any further. If the legislative intention was to treat the units as shares to attract all the incidents attached to the holding of a share in a company, the Legislature would have specifically said so, which is evident from clauses (a) and (b) of sub-section (3) of section 32 of the Unit Trust of India Act. The Legislature was very well aware of the consequences of treating a unit as a share. A share, as observed by the Tribunal, is a bundle of rights and a shareholder is one who can exercise those rights on his own. Some of the rights attached to the shareholding are for the shareholder to part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... results of dealings in shares by companies, other than investment, banking and finance companies, should be treated in a manner analogous to speculation business." It is also relevant to note that the Explanation introduces a legal fiction, that is to say, the activity of a company in the purchase and sale of shares of other companies, will be treated as speculation business by a legal fiction, The Explanation does not apply to an investment company or a company whose principal business is banking or money lending. From the objects, as stated hereinabove, it is clear that for the application of the said Explanation and to deem the activity of purchase and sale of shares, it is necessary that the shares so dealt with must be the shares of other companies. The expression "companies" used in that context must mean only companies incorporated under the Indian Companies Act as otherwise there is no question of any "shares" being issued by the company. The recommendations in the Wanchoo Committee Report and the object with which the Explanation is inserted make the above position clear. There is no question of any manipulation of results from dealing in shares of companies in the ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ended that Mrs. Gurmeet Kaur accompanied the chairman-cum-managing director, who was on his business tour for foreign countries, to enable him to discharge his social-cum-business obligations in an effective manner and therefore, it is a legitimate deduction allowable under section 37 of the Act. The Tribunal, on a consideration of the materials available on record, observed that it is not the case of the Revenue that her going abroad with her husband was for private or personal purposes and that in fact the Income-tax Officer has simply disallowed the expenditure stating that the expenditure was not laid out for the purpose of business. The Tribunal also noted that the Commissioner of Income-tax (Appeals) has sustained the disallowance only on that count. The Tribunal further noted that boarding and lodging expenses were not claimed, that her foreign trip was approved by the board of directors and therefore, the business interest in such trip can be presumed and that otherwise there is no need for the board of directors of the company to approve her trip if it was only for private or personal purposes. The Tribunal further relied on the observations of the Special Bench of the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wife of the director is incurred for purposes of business. The Gujarat High Court observed that : "...tax collectors do not want to discourage business executives and managing directors from undertaking foreign tours for business purposes nor to deprive them of the company of their wives in such tours, but, for that we do not think that in law, it would be permissible for the Income-tax Officer to allow the expenses incurred for rendering such company, however necessary and enjoyable it may be from the point of view of personal needs of those executives." Relying on the decision of the Supreme Court in State of Madras v. G. J. Coelho [1964] 53 ITR 186, it held that these are all personal expenses and would not entitle the assessee-company to claim the same as business expenses. But the Appellate Tribunal has relied on the decision of the Special Bench of the Tribunal in the case of Glaxo Laboratories (India) Ltd. v. Second ITO [1986] 18 ITD 226 (Bom), which distinguished the two decisions referred to above. It is the case of the assessee-company that the wife of the chairman-cum-managing director of the company accompanied him on his business tour and that the accompaniment was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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