Kerala H.C : Whether, on the facts and in the circumstances of the case, the interpretation sought to be put on s. 115J of the IT Act by the Tribunal is correct in law ?

Counsel Appeared

P.K.R. Menon & N.R.K. Nair, for the Respondent

JUDGMENT

ARIJIT PASAYAT, C.J. :

At the instance of the assessee, following questions have been referred to this Court, for opinion in terms of s. 256(1) of the IT Act, 1961 (in short ‘the Act’), by the Tribunal, Cochin Bench :

“1. Whether, on the facts and in the circumstances of the case, the interpretation sought to be put on s. 115J of the IT Act by the Tribunal is correct in law ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that ‘loss’ as it appears in s. 205(1), first proviso, cl. (b) of the Companies Act, 1956 r/w s. 115J of the IT Act, 1961 means ‘including depreciation’ ?”

The assessment year concerned is 1989-90. The assessee is a domestic company in which public are not substantially interested. During the relevant period it was engaged in the business of printing newspapers and journals. For the assessment year in question, the assessee filed a return showing a loss of Rs. 4,93,417 which included unabsorbed depreciation relating to the earlier years also. The account was prepared for a period of 21 months in the previous year. The AO computed

The assessee filed an application for rectification pointing out that the net loss as per the P&L a/c had not been taken into account in computing the book profit. The AO accepted the claim. However, he found that in allowing the loss under s. 205(1)(b) of the Companies Act, 1956 (inshort ‘the Companies Act’), the correct amount to be allowed was only the carried forward business loss of Rs. 29,330 as the same was lesser than the unabsorbed depreciation of the earlier years amounting to Rs. 2,36,480. Accordingly, he restricted the deduction to the extent of Rs.29,330. Computation was made in the following manner :

the book profit under s. 115J of the Act in the following manner :

“Net profit as per P&L a/c Add : Investment allowance reserve Less : Loss as per s. 205(1) of the Companies Act Book profits Rs. 35,055

3,07,811

3,42,866

1,19,521

2,23,345″

20/1

0/20

09

Rs.

“Net loss as per P&L a/c for the first period from

1st July, 1987 to 30th June, 1988. 2,38,938

Less : Net profit as per P&L a/c for the second

period 1st July, 1988 to 31st

March, 1989

35,055

Net loss as per books 2,03,883

Less : Investment allowance

reserve 3,07,811

Balance profit 1,03,928

Less : Loss under s. 205(1) of the

Companies Act 29,330

Balance profit 74,598″

Tax was levied at 30 per cent on the aforesaid balance under s. 115J of the Act. The assessee preferred an appeal before the Commissioner of Income-tax (Appeals), Cochin {in short ‘the CIT (A)’}, Computation done by the AO was upheld by the CIT(A). The assessee preferred second appeal before the Tribunal. The assessee’s stand was that for the purpose of s. 115J of the Act, loss or depreciation, whichever is less, should be computed as contemplated under the provisions of the Companies Act and the authorities failed to note the general principle that loss included depreciation also and that the entire unabsorbed depreciation relating to the earlier years should have been deducted to arrive at the book profit for the current year. The Tribunal placed reliance on the decision of the Andhra Pradesh High Court in V.V. Trans-Investments (P) Ltd. vs. CIT (1994) 119 CTR (AP) 184 : (1994) 207 ITR 508 (AP) : TC 24R.600 and dismissed the assessee’s appeal. Further, when a reference was sought for, same was accepted and the question set out above have been referred for opinion.

4. The word ‘loss’ in proviso (b) to s. 205(1) would include ‘depreciation’. In accounting parlance and in commercial sense, the word ‘loss’ is always taken as including ‘depreciation’. If depreciations were to be excluded, the legislature would have used the term ‘cash loss’. A comparison may be made with the language employed in s. 3(o) of the Sick Industrial Companies (Special Provisions) Act, 1985, wherein distinction is made between ‘accumulated loss’ and ‘cash loss’. In Garden Silk Wvg. Factory vs. CIT (1991) 94 CTR (SC) 136 : (1991) 189 ITR 512 (SC) : TC 27R.787, the apex Court has observed that unabsorbed depreciation was part of loss. Sec. 349(4) (1) of the Companies Act uses the expression ‘excess of expenditure over income’ which is narrower in scope and excludes ‘depreciation’. There is no reason to assign to the term ‘loss’ as occurring in s. 205, proviso, cl. (b) of the Companies Act a meaning different from the one in which it is understood therein solely because it is being read along with s. 115J.

5. Sec. 115J, Explanation, cl. (iv), is a piece of legislation by incorporation. If a subsequent Act brings into itself by reference some of the clauses of a former Act, the legal effect of that is to write those sections into the new Act as if they had been actually written in it with the pen, or printed in it, as was so admirably stated by Lord Esher, M.R. Once the object behind the legislation is taken note of, the inevitable conclusion is the provisions of s. 205 stand bodily lifted and incorporated into the body of s. 115J of the Act. On a plain reading of the provision, the irresistible conclusion is that s. 205(1), proviso cl. (b) of the Companies Act brings out the unabsorbed portion of the amount of depreciation already provided for computing the loss for the year. The expression ‘the amount provided for depreciation’ and ‘arrived at in both cases after providing for depreciation’ make it abundantly clear that in this clause ‘loss’ refers to the amount of loss arrived at after taking into account the amount of depreciation provided in the P&L a/c. The above position has been elaborately dealt with by the apex Court in Surana Steels (P) Ltd. vs. Dy. CIT (1999) 153 CTR (SC) 193 : (1999) 237 ITR 777 (SC), from which decision, we have gathered the conclusions.

The answer to the second question, therefore, is in the affirmative, i.e., in favour of the Revenue and against the assessee. In view of the answer to this question, there is no necessity to answer the first question as it would really be of academic interest.

[Citation : 247 ITR 95]