Madras H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the book profits for the purpose of s. 115J of the IT Act is to be computed after deducting the extra shift allowance relating to the earlier years and giving effect to cl. (iv) of Explanation to s. 115J ?

High Court Of Madras

CIT vs. Loyal Textile Mills Ltd.

Sections 115J, COMP 205

Asst. Year 1990-91

R. Jayasimha Babu & K. Raviraja Pandian, JJ.

Tax Case No. 234 of 1997

23rd September, 2002

Counsel Appeared

T. Ravikumar, for the Applicant : R. Meenakshisundaram, for the Respondent

ORDER

K. RAVIRAJA PANDIAN, J. :

The question referred for the opinion of the Court is as follows :

“Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the book profits for the purpose of s. 115J of the IT Act is to be computed after deducting the extra shift allowance relating to the earlier years and giving effect to cl. (iv) of Explanation to s. 115J ?”

The assessment year is 1990-91.

The assessee is a public limited company engaged in the manufacture and sale of yarn. For the previous year relevant to the asst. yr. 1990-91, a sum of Rs. 1,65,72,468 was debited in the accounts in accordance with ss. 265 and 350 of the Companies Act relating to extra/multiple shift allowance on certain machineries, which were not claimed in the earlier years. The AO was of the view that the allowance for the period not related to the accounting year were not allowable and, therefore, recomputed the profit and loss of the company by adding back the extra/multiple shift allowance to the book profits for arriving at the assessee’s taxable income under s. 115J. Though the assessee was unsuccessful before the CIT(A) before whom the recomputation made by the AO was objected to, ultimately succeeded before the Tribunal. The Tribunal directed the AO to recompute the book profit after deducting the extra shift allowance of earlier years and also by giving effect to cl. (iv) of Expln. 2 of s. 115J while arriving at the net profit. Hence, at the instance of the Revenue, the reference as above said is made. The relevant part of s. 115J of the IT Act reads as follows : “115J. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee being a company (other than a company engaged in the business of generation or distribution of electricity), the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1988, but before the 1st day of April, 1991 (hereafter in this section referred to as the relevant previous year) is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit. (1A) Every assessee, being a company, shall, for the purposes of this section, prepare its P&L a/c for the relevant previous year in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act, 1956 (1 of 1956). Explanation : For the purposes of this section, ‘book profit’ means the net profit as shown in the P&L a/c for the relevant previous year prepared under sub-s. (1A) as increased by : (a) the amount of income-tax paid or payable and the provision therefor : or (b) the amounts carried to any reserves (other than the reserves specified in s. 80HHD or sub-s. (1) of s. 33AC), by whatever name called; or (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (d) the amount by way of provision for losses of subsidiary companies; or (e) the amount or amounts of dividends paid or proposed; or (f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies; or (g) the amount withdrawn from the reserve account under s. 80HHD, where it has been utilised for any purpose other than those referred to in sub-s. (4) of that section; or (h) the amount credited to the reserve account under s. 80HHD to the extent that amount has not been utilised within the period specified in sub-s. (4) of that section; (ha) the amount deemed to be the profits under sub-s. (3) of s. 33AC; If any amount referred to in cls. (a) to (f) is debited or, as the case may be, the amount referred to in cls. (g) and (h) is not credited to the P&L a/c, and as reduced by : (i) the amount withdrawn from reserves (other than the reserves specified in s. 80HHD) or provisions, if any such amount is credited to the P&L a/c : Provided that, where this section is applicable to an assessee in any previous year (including the relevant previous year), the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1988, shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation; or (i) the amount of income to which any of the provisions of Chapter III applies, if any such amount is credited to the P&L a/c; or (ii) the amounts (as arrived at after increasing the net profit by the amounts referred to in cls. (a) to (f) and reducing the net profit by the amounts referred to in cls. (i) and (ii) attributable to the business, the profits from which are eligible for deduction under s. 80HHC or s. 80HHD; so, however, that such amounts are computed in the manner specified in sub-s. (3) or sub-s. (3A) of s. 80HHC or sub-s. (3) of s. 80HHD, as the case may be; or (iv) the amount of the loss or the amount of depreciation which would be required to be set off against the profit of the relevant previous year as if the provisions of cl. (b) of the first proviso to sub-s. (1) of s. 205 of the Companies Act, 1956 (1 of 1956), are applicable.”

5. Clause (b) of the first proviso to sub-s. (1) of s. 205 of the Companies Act reads as follows : “(b) if the company has incurred any loss in any previous financial year or years, which falls or fall after the commencement of the companies (Amendment) Act, 1960, then, the amount of the loss or an amount which is equal to the amount provided for depreciation for that year or those years whichever is less, shall be set off against the profits of the company for the year for which dividend is proposed to be declared or paid or against the profits of the company for any previous financial year or years, arrived at in both cases after providing for depreciation in accordance with the provisions of sub-s. (2) or against both;” Sec. 205 of the Companies Act provides for setting off of past losses or unabsorbed depreciation, whichever is less, against the book profits of the current year for determining profits for the purpose of declaring dividend. Hence, the unabsorbed depreciation has to be set off against book profit as per the statutory provision, which cannot be faulted by the authority under the IT Act. In the instant case, there is no dispute about the correctness of the figures of extra shift allowances and unabsorbed depreciation charged by the company in the accounting year ended 31st March, 1990, but the dispute is whether the same could be done in the accounting year relevant to the asst. yr. 1990-91. When the statute expressly requires the setting off of depreciation of earlier years also against the current year profits, such setting off has necessarily to be done. Sec. 205(1) of the Companies Act and s. 115J of the IT Act have been considered by the Supreme Court in the case of Surana Steels vs. Dy. CIT (1999) 153 CTR (SC) 193 : (1999) 237 ITR 777 (SC), while considering the question as to whether the term “loss” as appearing 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” held as follows : “Sec. 115J, Expln. cl. (iv), is a piece of legislation by incorporation. It was stated by Lord Blackburn that when a single section of an Act of Parliament is introduced into another Act, it must be read in the sense it bore in the original Act from which it was taken, and that consequently it is perfectly legitimate to refer to all the rest of that Act in order to ascertain what the section meant, though those other sections are not incorporated in the new Act. Once we have ascertained the object behind the legislation and held that the provisions of s. 205 stand bodily lifted and incorporated into the body of s. 115J of the IT Act, all that we have to do is to read the provisions plainly and apply rules of interpretation, if any ambiguity survives. Sec. 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 words “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. This interpretation would be consistent with the object sought to be achieved by enacting s. 115J of the IT Act, 1961. If “loss” were to be taken as pre-depreciation loss, then the resultant computation will not be in conformity with the tenor of the provisions of s. 205. The language of cl. (b) of the proviso to s. 205(1) is clear. It applies to those cases where the depreciation has been provided in accordance with the provisions of sub-s. (1) of s. 205.”

8. In another case Apollo Tyres Ltd. vs. CIT (2002) 174 CTR (SC) 521 : (2002) 255 ITR 273 (SC), the facts, which are similar to the case on hand in the sense that the assessee-company while determining its net profit for the relevant accounting year had provided for arrears of depreciation in its P&L a/c, which according to the Revenue was not in accordance with Parts II and III of Sch. VI to the Companies Act, 1956. Hence, the AO, while considering the case of the assesseecompany under s. 115J of the IT Act recomputed the said P&L a/c of the company so as to exclude the provision made for arrears of depreciation. In that case, the Supreme Court has held as follows : “The AO, while computing the book profits of a company under s. 115J of the IT Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the companies Act as having been properly maintained in accordance with the Companies Act. The AO, thereafter, has the limited power of making increases and reductions as provided for in the Explanation to s. 115J. The AO does not have the jurisdiction to go behind the net profits shown in the P&L a/c except to the extent provided in the Explanation. The use of the words “in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act” in s. 115J was made for the limited purpose of empowering the AO to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the AO has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinised and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-s. (1A) of s. 115J does not empower the AO to embark upon a fresh enquiry in regard to the entries made in the books of account of company.” While so holding, the Supreme Court has ultimately held that “while determining the book profits under s. 115J, the AO could not recompute the profits in the P&L a/c by excluding provisions made for arrears of depreciation.”

9. In the light of the abovesaid judgments of the Supreme Court, the question is answered in favour of the assessee and against the Revenue.

[Citation : 261 ITR 307]

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