'Business Profit' includes depreciation written back in context of section 32AB. However, the question of law left open by the Supreme Court - also some relevant discussion on binding nature of judgments or persuasive value.

[C.A. DEV KUMAR KOTHARI]

Business profit:

What is business profit is to be determined as per relevant provision under consideration. In some circumstances some items of credits or debits in the profit and loss account may have to be adjusted in determining business profit for particular purpose. Some other relevant terms are 'business income', 'chargeable profit from business', 'operating profit', 'cash profit', 'commercial profit', 'profit before depreciation', 'profit after depreciation' etc. which needs consideration while considering different  provisions and for  different  purposes.

Therefore, the general rule can be described that 'profit' or 'income'  is to be determined as per specific provision, the purpose of provision and generally the purpose of determination of profit. 

Section 32AB

Section 32AB provided for certain deduction in respect of cost of new eligible  plant and machinery acquired and / or certain prescribed deposits made by the assessee.  There was an  upper limit for deduction u/s 32AB  which was 20% of the profits of business or profession which was to be  computed from  the audited accounts of the and allowable deduction was to be certified by an accountant in accordance with the sub-section (5).  In this connection the assessee had to furnish a report from accountant in form no.3AAA in terms of section 32AB(5) and Rule 5AB.  In this write up we are only concerned with the aspect ' business profit' for this purpose. 

Investment deposit scheme, 1986

For the purpose of regulating the investment deposits eligible for deduction u/s 32AB, the Central Government had formulated Investment Deposit Account Scheme, 1986.

The history of provision

The section was inserted by the Finance Act, 1986 with effect from 1.4.1987 and has seen certain amendments thereafter.  However, as per second proviso to sub-section (1), no deduction under the section is allowable from the assessment year 1991-92 onwards.  Therefore, the provision has historical importance.  However, the relevant concept about 'business profit' is an important aspect in the context of tax on income and therefore, the law laid down by the Supreme Court is still very much relevant for the tax practitioners besides this write-up can also  be useful in relation to old matters which are pending at different forums. 

Depreciation write back and business profit

Adjustment for depreciation debited in profit and loss account and excess depreciation written back are a very common while dealing with accounts and tax matters for corporate sector. This is mainly due to reason that accounts are prepared as per the provisions of the Companies Act and in income tax depreciation is allowed as per provisions of the Income Tax Act and Rules framed there under.

The method of depreciation is many times changed by assesses.  The decision to change a method may be due to several reasons like overall position of the fixed assets held by the assessee, increase or decrease in valuation of fixed assets, expected useful life of such assets, accidental damages, changes in liability towards capital borrowed for acquiring assets etc.  Sometimes, change in provisions relating to rate of depreciation under tax laws or the provisions of the Companies Act may also be a reason to change the rate of depreciation and / or the method of depreciation to be provided in the accounts. It is also true that a taxpayer is free to arrange his affairs in such legal and permissible manner which enables him to reduce his tax liability. Therefore, to take the benefit of changes in circumstances or to meet requirement of changed circumstances  a change in method of accounting in general and depreciation accounting in particular may be desirable on commercial expediency. When a change is made, there may be different  situations. Few examples  are as follows:-

(a)   It is found that lower amount of depreciation was provided in earlier periods and therefore, certain amount of depreciation is debited in the profit and loss account which is in excess of what could have been debited if there was no change- as a result profit is reduced.

(b)   In some cases it is found that earlier excessive depreciation has been provided and therefore, certain amount is credited back in the profit and loss account and added to the written value of assets as a result profit is increased.

(c)  Both types of situations, as given in (a) and (b) may be found in respect of different assets. In the profit and loss account a single entry may be made r on net basis or two entries on gross basis on debit side and credit side can be made for short and excess depreciation of earlier year adjusted.

Debit or credit for such depreciation is to affect business profit:

Whether there be a debit or a credit in the profit and loss account on the change in method of depreciation, this has effect on the business profit for the year and also on the position of reserves.  Though the effect given is relating to earlier period, however, because decision to change the method was taken during the previous year, therefore, the amount pertains to the previous year and accordingly, the amount credited in the profit and loss account as excess depreciation written back, will be part of business profit and any amount debited in the profit and loss account as depreciation short-provided in earlier years, will be business expenditure for the previous year, when  we are required to take profit or loss as per profit and loss account for any computation.

As discussed earlier, for different purposes different method of adjustment may be required. For one  purpose any adjustment may not be required  whereas for some other purpose adjustment may be needed.

Adjustment for depreciation in computation

Under specific head of income:

As per section 32(1) depreciation allowable is to be worked out. Depreciation is allowable only when  assessee had owned and used depreciable assets and has income  under different heads of income (primarily under head income from business or profession and income from other sources). Depreciation worked out as per section 32 (1) is to be allowed against ' chargeable income', which may arise under any heads of income including 'salary', house property and capital gains besides the primary heads to which depreciation may relate. Therefore, it is clear that the depreciation allowable is governed by the provisions of section 32 and any accounting treatment is of no relevance for computation of total income, which is chargeable to tax.    

Therefore in computation of income under different heads and in computing gross total income depreciation debited in the profit and loss account is adjusted by adding in the amount of profit as per profit and loss account. In case any excess depreciation is written back, the same is reduced from profit as per profit and loss account.  However, this specific exercise involving neutralization of debits and credits found in the profit and loss account in respect of depreciation entries is only for computation of taxable income and may not be applicable for other computations under the Act. For this purpose we have to observe and follow specific provisions. For example, for the purpose of computing 'business profit' for allowing certain deductions or fixing upper limits for any allowable deduction or similar purposes, there can be different meaning of the expression 'business profit' or 'business income', depending on the provisions.

Case relating to Section 32AB before the  Supreme Court

The case of CIT v. Alfa Laval (India) Ltd [2007] 295 ITR 451 (=2009 -TMI - 32446 - SUPREME Court) relates inter alia to computation of 'business profits' for determining upper limit of deduction under section 32AB.

For the previous year ended 31.3.1989, the assessee company, in accordance with Circular of Company Law Board recomputed depreciation allowance and credited excess amount of depreciation provided in earlier years in its profit and loss account.  The assessee contended that such credit in the profit and loss account is part of business profit for the year for the purpose of section 32AB. 

The assessing officer tried to apply the principle of depreciation as per Income-tax Act and Rules (as discussed earlier) and therefore, deducted the amount of excess depreciation credited in the profit and loss account from the profit as per profit and loss account.

It may be mentioned that such credit in the profit and loss account as well as debit for depreciation in the profit and loss account were adjusted while computing the taxable income in which  allowance of  depreciation is allowed as per section 32.The A.O. applied the same methodology for computing business profit for the purpose of section 32AB.

The order of the assessing officer that depreciation written back had to be reduced from the profits as shown in the profit and loss account   was upheld by the Tribunal. 

However, on assessee's appeal, the High Court in  Alfa Laval India Ltd. v. Deputy CIT [2004] 266 ITR 418 (Bom) (=2009 -TMI - 32446 - SUPREME Court) held as follows:-

             " That as per the circular issue by the Company Law Board, it was necessary for the assessee to rework the depreciation.  As a result, increased profits to the tune of Rs.81,33,667 had to be written back by way of adjustment in the profit and loss account.  Therefore, no fault could be found with the adjustment made by the assessee in the profit and loss account.  For working out relief under section 32AB(3) of the Income-tax Act, the profits of the business are required to be reduced by an amount or amounts withdrawn from reserves or provisions, if such amounts are credited to the profit and loss account.  In the present case, there was no withdrawal of amount from reserves or provisions and, therefore the amount written back and credited to the profit and loss account on account of reworking of the depreciation, as per the circulars of the Company Law Board, could not be reduced from the profits eligible for relief under section 32AB."

Thus the High Court held that the amount of depreciation written back is part of business profit for the purpose of section 32AB. Aggrieved by the judgment of the High Court, the revenue preferred appeal before the Supreme Court. And the Supreme Court vide CIT v. Alfa Laval (India) Ltd. confirmed the judgment of the High Court. The Supreme Court passed the order as follows:

Order

On the facts of the case, we do not wish to interfere.  The appeal is dismissed, leaving the question of law open.

Question of law remain open:

Though the Supreme Court has dismissed the appeal however, in the order it is mentioned that the question of law remain open.

The dismissal of the appeal would have amounted to affirming the judgment of the High Court, however, since the dismissal is with a rider that is 'leaving the question of law open'. Therefore, one need to examine the significance of such a rider.

The judgment of Bombay High Court is binding in its jurisdictional area. This has persuasive value for deciding similar matters in case of other areas also. Furthermore, since the Supreme Court has dismissed the appeal, though leaving question of law open, the persuasive value of the judgment should be considered enhanced. The Tribunals all over India should prefer to follow the judgment of Bombay High Court  in comparison to differing decisions of co-ordinate benches of Tribunal. However, in a case  where jurisdictional court has taken a different view, then off course Tribunal will be bound to follow the judgment of the High Court in its jurisdiction.

Judicial Hierarchy and discipline:

ITAT should follow judgments of even non jurisdictional  HC which are beneficial to assessee (in case different views are there amongst other non jurisdictional high courts). Special  bench decision should not be given higher persuading value than the judgment of  non jurisdictional High Courts. This is because when matter will be heard by the  High Court of jurisdiction, higher persuasive value will be given to judgments of other High Courts and not to the decision of Special Bench of ITAT.   

ITO  Vs. Ranisati Fabric Mills (P) Ltd.  In IT APPEAL NO. 5010 (MUM) OF 2004

For A.Y. 2000-2001Mumbai ITAT in its order dated  AUGUST 7, 2007 held that

  "A solitary judgment of any High Court in country on a particular point or issue, should be followed in its letter and spirit by all Benches of Tribunal notwithstanding contrary views are expressed by some Benches of Tribunal, unless there are strong reasons to deviate from view expressed by High Court."

Though the Tribunal has added a rider "unless there are strong reasons to deviate from view expressed by High Court.", however,  in view of author it is not correct approach of the Tribunal. This is because if the same members decide a case in jurisdiction area of the High Court which has so far rendered a solitary judgment on the relevant issue, then the members of Tribunal will be bound to follow the same. Furthermore, suppose the judgment of non jurisdictional High Court is accepted, by revenue , then such judgment factually become binding on the revenue all over India.  Therefore, in such situation the Tribunal Benches in non jurisdictional area should also follow the judgment of non jurisdictional court. Author feels that a Tribunal cannot  say that there are strong reason to take a different view, if the relevant law and facts are same. The Tribunals reasoning are analyzed below:

a.       A due respect should be given to the judgment of non-jurisdictional High Court and it should ordinarily be followed by other subordinate judicial or non-judicial bodies situated out side the jurisdiction of that High Court ( this position will prevail until there is  contrary judgment of other High Court or Court of Jurisdiction - added by author)

b.      If a different view os to be taken by Tribunal or other  subordinate authorities they should  have strong reasons to deviate from the view taken by the non-jurisdictional High Court.

c.        If it is not done, the hierarchical judicial system would collapse.

d.       In the case of CIT v. Vegetable Products Ltd. 2008 -TMI - 6382 - SUPREME Court the Apex Court held that if two contrary views are taken by different High Courts, view favourable to the assessee should be adopted, but, nowhere, it has been stated that the view expressed by a solitary High Court can be ignored by the non-jurisdictional subordinate bodies without any reasons.

It was therefore, held that a solitary judgment of any High Court in the country on a particular point or issue, should be followed in its letter and spirit by all Benches of the Tribunal notwithstanding contrary views are expressed by some Benches of the Tribunal, unless there are strong reasons to deviate from the view expressed by the High Court.  Otherwise, the hierarchical judicial system would collapse.

Similar views have also been taken in many other cases for example:
Pune Bench in the case of ACIT vs. Aurangabad Holiday Resorts P. Ltd. 111 TTJ 741 (Pune).
Tej International (P.) Ltd vs  Deputy Commissioner Of Income-Tax. 69 TTJ 650 ITAT DELHI

In view of above discussion the decision of Bombay High Court, in case of Alfa laval on the issue of depreciation written back being business profit should be followed by Tribunals.