TMI Blog1994 (9) TMI 129X X X X Extracts X X X X X X X X Extracts X X X X ..... ontroversy in better perspective, it would be necessary to reproduce the following figures appearing in the order of the Assessing Officer and thereafter taken note of by the Commissioner of Income-tax (Appeals) : (Figures in Crores) 30-6-198931-3-199030-6-1990 "Depreciation charged (for the year) as per Profit Loss A/c. 3.78 46.82 9.08 WDV of Opening assets 45.94 31.19 93.45 WDV of Closing assets 93.45 116.33 207.10 General Reserve (as on) 20.75 Nil 25.25 Dividend (as on) 50% N.A. 50% Net Profit (Before Tax) 26.89 (-) 6.11 41.82 Provision for Dividend 14.54 ---- 35.85" 37. An examination of the aforesaid chart revealed that the assessee had provided depreciation as on31-3-1990at a figure of Rs. 46.82 crores by passing a journal entry in the books of account for the accounting period ending30th June, 1990, but the said entry was reversed at the time of closing of the books on30th June, 1990. It was further found that depreciation as on30th June, 1990was provided in the books of account on the method followed in the past viz., "straight-line" at a figure of Rs. 9.08 crores. The Assessing Officer further found that the depreciation of Rs. 46.82 crores had no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it and loss account prepared with reference to the entries in the books of account being maintained on accountancy principles and past practice; (iv) That the term "book profit" reaffirmed that the said profit should have its roots in the assessee's books of account; (v) That depreciation to be charged was to be in accordance with the method being consistently followed once again with reference to the books of account; (vi) That the profit and loss account prepared by the assessee if not in conformity with the books of account or in accordance with Parts II and III of Schedule VI; the Assessing Officer had the power to reject the same and re-compute the "book profit"; (vii) That section 205 of the Companies Act stipulated the various standard methods of charging depreciation, but nowhere had any option been given to the Directors of the company to pick and choose as they liked since the method once adopted was required to be followed regularly as even required by the principles of accountancy. That the company could switch over to a different method if the Directors felt that the method followed till that point of time was required to be abandoned in favour of another metho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered valid for charging depreciation under the Companies Act; and (xii) That a simultaneous amendment was carried out in respect of section 350 of the Companies Act by the introduction of Schedule XIV prescribing rates of depreciation for various categories of assets both on straight-line method and WDV method. 40. In view of the aforesaid the Assessing Officer considered the provision for depreciation to the extent of Rs. 6.11 crores as a valid charge against "book profits" and treated the balance viz., Rs. 40.71 crores as a reserve. The latter figure was included as a part of the "book profit" in view of clause (b) of Explanation to section 115J(1A). The "book profit" of the assessee for purposes of section 115J was computed at a figure of Rs. 34,00,83,889 and income at 30 per cent thereof was calculated at Rs. 10,20,24,930. 41. Being aggrieved with the view taken by the Assessing Officer the assessee came up in appeal before the Commissioner of Income-tax (Appeals). At this stage detailed written submissions were filed and which have been reproduced verbatim in the order of the first appellate authority from pages 12 to 39. For purposes of disposing of the present appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bed under section 44AB filed along with the said audited accounts. The accounts of the company had further been audited under the Companies Act and the audit report under the same Act had also been attached along with the profit and loss account and tax audit report. The profit and loss account had been prepared in accordance with the provisions of Schedule VI and even during the course of the assessment proceedings the Assessing Officer had not pointed out any defect; (7) That although the income to be computed under section 115J was a notional income and not a real income it was still an income to be computed under the Income-tax Act. That even after the amendment of the Companies Act in 1988 vis-a-vis the provision relating to depreciation the same had to be allowed as per the rates prescribed under the Income-tax Act and Rules while computing the total income of the assessee. Further as far as the Income-tax Act was concerned, whether it was a normal assessment or the working out of the income under section 115J the depreciation had to be allowed as per the Income-tax Act and not that prescribed under the Companies Act; (8) That it was an established rule of interpretation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther purpose. However, for purposes of section 115J a profit and loss account for the period ending 31st March, 1990 had been prepared and depreciation charged there-under was the one pertaining to the provisions of the Income-tax Act; (14) That the assessee could claim depreciation even without passing any entries in the books of account and the view canvassed thereafter being that in case the assessee had made a short provision in respect of depreciation in the profit and loss account it could still claim depreciation at the higher rates envisaged under the Income-tax Act for computing its total income; (15) That the concept of "book profit" had to be understood with reference to the figure worked out after taking into account the depreciation admissible under the Income-tax Act; (16) That section 115J was a non obstante section and no other provisions of the Income-tax Act were applicable to it. Further it was not a real income which was sought to be taxed under the said section, but a notional income and that being 30 per cent of the book profit. That the term "book profit" meant the profit and loss account for the relevant previous year prepared under sub-section (1A) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax rates were also being followed for purposes of the Companies Act. Further Schedule XIV to the Companies Act was relevant for sections 205, 349 and 350 of the Companies Act and not relevant for purposes of Parts II and III of Schedule VI to the Companies Act; (21) That even for purposes of sections 205, 349 and 350 for which Schedule XIV was relevant the rates of depreciation other than those prescribed in the said Schedule could be charged and that the said view had been accepted by the Department of Company Affairs and the Institute of Chartered Accountants of India (Circular No. 2 of 1989 dated 7-3-1989 issued by the Department of Company Affairs referred to); and (22) That there was no justification on the part of the Assessing Officer to compute assessee's income under section 143(3) by allowing deduction in respect of depreciation at the rates stipulated under the Income-tax Act and in the same assessment order while working out the "book profit" under section 115J the said figure of depreciation already allowed was substituted for a lower figure prescribed in Schedule XIV to the Companies Act. 42. In addition to the aforesaid submissions the learned counsel appearing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Act. The main observations and views expressed by the first appellate authority can be summarised as under:---- (i) That "book profit" for purposes of section 115J was closely linked with the provisions of section 205 of the Companies Act, 1956 and this being further clarified by "Departmental Circular No. 495 dated22-9-1987". Further the Explanation to sub-section (1) of section 115J gave the definition of "book profit" by incorporating the requirements of section 205 of the Companies Act. That for computing "book profit" under section 115J a company was required to prepare its profit and loss account in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act read with the requirements of section 205 of the said Companies Act; (ii) As per provisions of section 211(2) of the Companies Act, every profit and loss account of a company was required to give a true and fair view of the profit or loss of the company for the financial year in accordance with the requirements of Part II of Schedule VI which required disclosure in respect of the amount for depreciation, renewals or diminution in the value of fixed assets. If provision was made the method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... him, the assessee could charge depreciation either as per Schedule XIV of the Companies Act or at a higher rate on the basis of a report of a technological expert, but under no circumstances could it claim the same as per the rates prescribed in the Income-tax Rules. The profit and loss account, according to him, had not been prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act. 46. We have heard both the parties at considerable length vis-a-vis the question of depreciation in computing the book profit under section 115J. We do not propose to set out the arguments advanced by both the parties as these are quite identical to those raised and considered at the first appellate stage. The learned counsel invited our attention to the relevant provisions of the Income-tax Act as also the Companies Act reiterating as he did before the Commissioner of Income-tax (Appeals) that depreciation as claimed and allowed in computing taxable income/loss under section 143(3) was a valid charge even for computing the book profits under section 115J. The submissions of the learned Departmental Representative, on the other hand, were that the proposition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Taj Traders [1980] 121 ITR 535 (SC); (xiv) CIT v. Autofin Ltd. [1985] 151 ITR 741 (AP); (xv) CIT v. Kulu Valley Transport Co. (P.) Ltd. [1970] 77 ITR 518 (SC) ; (xvi) CIT v. T. V. Sundaram Iyengar Sons (P.) Ltd. [1975] 101 ITR 764 (SC); (xvii) CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC); (xviii) CWT v. India Exchange Traders' Association [1992] 197 ITR 356 (Cal.). 48. The learned Departmental Representative, however, sought to distinguish the aforesaid decisions on the ground that these nowhere dealt with the subject-matter under consideration in the present appeal. 49. We have examined the rival submissions and have also perused the material on record to which our attention was invited. The decisions cited at the bar have also been duly considered. We would, at the outset, like to refer to the provisions of section 115J itself. Clause (1A) speaks of a profit and loss account to be prepared in accordance with Parts II and III of Schedule VI to the Companies Act, 1956. Clause (iv) of the Explanation to the section speaks of section 205 of the Companies Act. Then again Part II of Schedule VI refers to the "amount provided for depreciation" and if no such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht. It could in fact be described as a superfluous entry not related to any figure of assets or W. D.V. recorded in the books of account. These facts by themselves make this case different to the ones relied upon by the learned counsel. To mention one in the case of Modern Woollens Ltd., the assessee had changed its method of charging depreciation and thereafter followed the changed method in the subsequent years as well. It is not so in the present case. 53. Then again as per Part III of Schedule VI anything over and above the amount which can be considered as a provision towards depreciation would be treated as a reserve and required to be added to the "book profit". In the present case, the Directors were of the opinion that a figure of Rs. 6.11 crores represented the provision for depreciation on the "straight-line" method followed in the past as also subsequently. Hence, the difference between the figure claimed under section 115J, viz., Rs. 46.82 crores and Rs. 6.11 crores, viz., Rs. 40.71 crores would be a reserve. 54. We do not propose to advert to the "legislative intent" in bringing on the Statute book section 115J as this is already discussed in the orders of the tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew of any legislative enactment. Section 115J clearly contemplated depreciation in accordance with the Companies Act and not the Income-tax Law and any other rate would have to be supported by a "technological evaluation". In case it was felt that income-tax rates were rationale and acceptable for purposes of section 115J then nothing further need have been written in section 115J. The entire issue has to be examined in the light of the amendments brought about in 1988 in the Income-tax Act and the Companies Act with reference to depreciation and the intention behind introducing section 115J. All these have been discussed at length by the tax authorities in their respective orders and a decision arrived at with which we wholly agree. 57. In the final analysis, we uphold the order of the Commissioner of Income-tax (Appeals) and reject the relevant ground in the appeal. 58. The next ground in the appeal questions the action of the tax authorities in including a sum of Rs. 18,79,83,193 earned as short-term capital gain as part of the "book profit" for purposes of section 115J. It is not disputed between the parties that the aforesaid short-term capital gain arose as the result of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dividend and no relief was sought on account of investment in approved modes. According to us, entries in the books of account are not determinative of the exact nature of a transaction and one has to take a decision after ascertaining the legislative intent as also the rationale behind the introduction of a particular provision and in this case we mean section 115J. Before we proceed further, we would like to reproduce certain observations recorded by the Special Bench as follows: "A reference to the requirements of the Companies Act shows that it is concerned with the result of the working of the company. Consequently, it cannot be directly concerned with changes in the capital structure. In particular, the profit and loss account is concerned with items of income and expenditure and, therefore, any profit derived by realisation of the capital asset would not be an item of income. As a matter of sound accepted accounting practice, the assessee was entitled to treat the accretion to a fixed asset when realised as a capital reserve particularly when the realised amount has been reinvested in another asset and was not available for distribution as profit. We are, therefore, of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which arose to it on account of capital gains. The Special Bench has discussed the provisions of section 80VVA which were replaced by section 115J and taken specific note of the fact that deduction under section 80T in respect of capital gains was not required to be restricted under the replaced section. There is also a discussion on the Memorandum and the speech of the Finance Minister with reference to the provisions of section 115J. The Tribunal has further observed that on the basis of sound accepted accounting principles an assessee was entitled to treat the accretion to a fixed asset when realised as a capital reserve "particularly when the realised amount has been re-invested in another asset and was not available for distribution as profit". According to us, the latter observation does not qualify the earlier one and does not take away the relief envisaged. In other words, capital gains were not required to be included for purposes of section 115J and more so when the funds were not available for distribution as profit having been re-invested in another asset. Following the Special Bench decision we direct the Assessing Officer to exclude the short-term capital gains the qu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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