1993 (12) TMI 83 - AT - Income Tax

Summary

Issues Involved:
1. Interpretation of the term 'loss' in Section 115J(1A)(iv) of the Income-tax Act, 1961.
2. Whether 'loss' should include 'depreciation' for the purpose of computing book profits under Section 115J.

Detailed Analysis:

1. Interpretation of the term 'loss' in Section 115J(1A)(iv):

The primary issue in these consolidated appeals is the interpretation of the term 'loss' in Section 115J(1A)(iv) of the Income-tax Act, 1961. The Commissioner of Income-tax (Appeals) [CIT(A)] had interpreted 'loss' to include 'depreciation,' directing the Assessing Officer to recompute the income under Section 115J accordingly. The Department appealed against this interpretation, arguing that 'loss' should be understood as 'loss' before absorbing or allowing depreciation.

2. Whether 'loss' should include 'depreciation' for the purpose of computing book profits under Section 115J:

The Tribunal examined various conflicting decisions from different Benches of the ITAT on this issue. The Tribunal noted that the term 'loss' is not defined in the Income-tax Act, 1961. However, in commercial and accounting practices, 'loss' means the excess of expenditure over income, which includes depreciation as an expense. The Tribunal emphasized that depreciation is an intangible expense that must be charged to the profit and loss account to determine the net results of a business accurately.

The Tribunal also considered the provisions of Section 32(2) of the Income-tax Act, which deals with the carry forward of unabsorbed depreciation. According to this provision, 'loss' for the purpose of computing business profits does not include unabsorbed depreciation. However, the Tribunal found that this distinction is artificial and created to give special status to unabsorbed depreciation.

The Tribunal then examined Section 115J(1A)(iv) and its reference to Section 205 of the Companies Act, 1956. The Tribunal noted that the expressions used in Section 115J(1A)(iv) are 'the amount of the loss' and 'the amount of depreciation,' which should be understood in the same sense as in Section 205 of the Companies Act. According to the Tribunal, 'loss' in the Companies Act means loss after providing for depreciation, and there is no distinction between business loss and unabsorbed depreciation in commercial and accounting practices.

The Tribunal rejected the Department's contention that interpreting 'loss' to include depreciation would lead to an anomalous situation. The Tribunal found that such an interpretation aligns with the legislative intent of Section 115J, which aims to tax companies on a minimum basis by considering their book profits.

The Tribunal also disagreed with the ITAT, Hyderabad Bench's decision in V.V. Trans-Investments (P.) Ltd., which had upheld the Department's view. The Tribunal found that the expressions 'amount of loss' and 'amount equal to depreciation' in Section 115J(1A)(iv) should be treated independently and not as synonymous with 'business loss' and 'unabsorbed depreciation' as per the Income-tax Act.

The Tribunal concluded that the expression 'loss' in Section 115J(1A)(iv) must be construed to mean loss after charging depreciation, in line with Section 205 of the Companies Act. Therefore, the Tribunal upheld the CIT(A)'s decision in both appeals, dismissing the Department's appeals.

Conclusion:

The Tribunal held that for the purpose of Section 115J(1A)(iv), the term 'loss' must include 'depreciation,' and the 'loss' should be understood as the loss after charging depreciation to the accounts. The Tribunal dismissed the Department's appeals, upholding the CIT(A)'s direction to recompute the income under Section 115J accordingly.