TMI Blog2008 (12) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... he Revenue in the appeal, and which was considered by the Tribunal, in the impugned judgment was; whether the assessee could be permitted to deduct depreciation pertaining to the current year, amounting to Rs 16,47,417/-, which is not, debited to the profit and loss account, while arriving at 'book profits' under Section 115J of the Act. Accordingly, by our order dated 28.11.2008, we had framed the following substantial question of law:- ''Whether the Income Tax Appellate Tribunal was correct in law in allowing depreciation of Rs 16,47,417/- in computation of book profits under Section 115J, even though it was not debited in the profit and loss account, although mentioned in the notes to the account'' 2. Counsel agreed that the filing of paper books be dispensed with and that the appeal be heard straight away. Consequently, on the aforesaid date i.e., 28.11.2008 itself, we heard submissions advanced by the counsel for both parties in respect of the afore-mentioned question of law. 2.1 The aforesaid question of law arises in the background of the following facts:- 2.2 On 31.12.1990, the assessee had filed a return of income tax claiming a loss of Rs 1,04,16,643/-. Howe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingly, partly allowed the appeal of the assessee. 2.8 The assessee being aggrieved, carried the matter in appeal to the Tribunal. By the impugned judgment, the Tribunal allowed the appeal of the assessee and sustained its claim that a deduction, in respect of, depreciation for the current year will have to be allowed while, computing book profits under Section 115J of the Act. 3. SUBMISSION OF THE COUNSEL FOR PARTIES Mr. R.D. Jolly, learned counsel representing the Revenue, has vociferously argued that the adjustments to the profit and loss account of the company can be carried out only in accordance with the provisions set out in the explanation to Section 115J. It was his contention that in view of the definition of 'book profit' as given in the explanation to section 115J, the net profit as shown in the profit and loss account, in the relevant previous year, can only be adjusted i.e., increased or reduced, as the case may be, by reference to heads referred in clauses (a) to (ha) and clauses (i) to (iv) of the explanation to Section 115J. It was thus contended that, as the assessee admittedly, had not charged depreciation to the profit and loss account, no adjustment co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Supreme Court in its judgment in the case of Surana Steels Pvt Ltd (supra). The Supreme Court observed that the said section has been inserted in the statute to bring, within the tax net, prosperous companies which were paying zero tax, even though they had profits and were declaring dividends. The object being, that such companies, should be made to pay minimum amount of tax, which under the extant provision is equal to 30% of the book profits. 4.2 The issue, however, which has arisen repeatedly is: how are the 'book profits' required to be calculated' For this purpose we are required to note certain provisions from the Income Tax Act, as well as, the Companies Act. 4.3 Section 115J of the Act, in so far as it is relevant for the purpose of the appeal, is extracted hereinbelow:- '(1A) Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of parts II and III of Schedule VI to the Companies Act, 1956. Explanation:- For the purposes of this section, 'book profit' means the net profit as shown in the profit and loss account for the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present appeal are extracted below:- ' Section 211 (1) Every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of this section, be in the form set out in Part I of Schedule VI, or as near thereto as circumstances admit or in such other form as may be approved by the Central government either generally or in any particular case and in preparing the balance sheet due regard shall be had, as far as may be, to the general instructions for preparation of balance sheet under the heading 'Notes' at the end of that part: Provided that nothing contained in this sub-section shall apply to any insurance or banking company or any company engaged in the generation or supply of electricity or to any other class of company for which a form of balance sheet has been specified in or under the Act governing such class of company. (2) Every profit and loss account of a company shall give a true and fair view of the profit or loss of the company for the financial year and shall, subject as aforesaid, comply with the requirement of part II of Schedule VI, so far as they are ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it would clearly fall within the ambit of the explanation to Section 115J of the Act which defines 'book profit' to mean 'net profit' as 'shown' in the profit and loss account for the relevant assessment year. 4.10 To our minds, as long as the depreciation which is not charged to profit and loss account but is otherwise disclosed in the notes of the accounts, it would come within the ambit of the expression 'shown' in the profit and loss account, as notes to the account, form part of the profit and loss account by virtue of a sub-section (6) of Section 211 of the Companies Act, 1956. This is quite evident if the provisions of sub-section (6) of the Section 211 of the Companies Act, are read in conjunction with, sub-section (1A), as well as, the explanation to Section 115J of the Act. 4.11 Another important aspect of the matter is that the expression used by legislature is 'net profit' in contra distinction to the well known accounting term 'cash profit'. The net profit of a company cannot be determined till all items of income and expenses as recognized, as well as, depreciation are taken into account. Depreciation is nothing but loss of value of an asset arising from its u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dance with the provisions of Parts II and III of Schedule VI of the Companies Act. It was further observed that the computation of net profit in view of the prescribed Accounting Standard (AS-5) required prior period expenses/extraordinary items to be shown separately and the fact that these items were shown separately did not mean that they would not constitute part of the net profit. 4.14 The court also observed that the normal approach is to include prior period items in the determination of net profit or loss for the current period; however, the alternative approach was to show such items in the statement of profit and loss account after determination of current net profit or loss so as to indicate the effect of such items on the current profit and loss. 4.15 In our view, the ratio of the said judgment would apply notwithstanding the fact that there is no debit to the profit and loss account, in view of our discussion above that net profit cannot be determined without taking into account the information disclosed in the notes appended to the accounts which as observed by us hereinabove, form part of the accounts of the company/assessee. 5. The matter can be looked a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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