1998 (8) TMI 68 - HC - Income Tax

Book Profits Depreciation Speculation Loss Same Business Foreign Travel New Plant And Machinery

Summary

Issues Involved:
1. Determination of net profit after providing for arrears of depreciation under section 115J of the Income-tax Act, 1961.
2. Eligibility of dividend income from Unit Trust of India for computing profits of eligible business under section 32AB of the Income-tax Act, 1961.
3. Treatment of business in purchase and sale of units and its classification as speculation business under section 73 of the Income-tax Act, 1961.
4. Allowability of foreign travel expenditure incurred for the wife of the chairman-cum-managing director as a business deduction.

Issue-wise Detailed Analysis:

1. Determination of Net Profit After Providing for Arrears of Depreciation:
Key Points:
- The assessee deducted Rs. 13,66,39,051 as arrears of depreciation in the profit and loss account.
- The assessing authority disallowed this deduction, stating it was not in accordance with Parts II and III of the Sixth Schedule to the Companies Act, 1956.
- The Tribunal held that prior year's depreciation must be deducted to reflect the true financial position.
- The Tribunal's findings included that the introduction of Schedule XIV mandated depreciation calculation based on shift working, and arrears of depreciation should be considered as part of current depreciation.

Court's Analysis:
- The court reviewed the provisions of section 115J and Parts II and III of the Sixth Schedule to the Companies Act.
- It concluded that the profit and loss account prepared in accordance with these provisions does not contemplate making a provision for arrears of depreciation a charge against the profits of that year.
- The court held that the Tribunal's approach was incorrect and that the net profit should be computed without deducting arrears of depreciation.

Judgment:
- The court answered the question in the negative, in favor of the Revenue and against the assessee.

2. Eligibility of Dividend Income from Unit Trust of India:
Key Points:
- The Tribunal included Rs. 1,51,89,760 dividend income from Unit Trust of India in the profits of eligible business under section 32AB.
- The Revenue contended that dividend income should be assessed under "Other sources" and not as business income.

Court's Analysis:
- The court examined section 32AB and the definition of "eligible business."
- It noted that eligible business includes all business activities except those specifically excluded.
- The court held that the business of buying and selling units of the Unit Trust of India is an eligible business and the dividend income forms part of the profits of eligible business.

Judgment:
- The court answered the question in the affirmative, in favor of the assessee and against the Revenue.

3. Treatment of Business in Purchase and Sale of Units:
Key Points:
- The Commissioner of Income-tax (Appeals) treated the loss from the sale of units as speculation loss under the Explanation to section 73.
- The Tribunal held that units are not shares and therefore, the Explanation to section 73 does not apply.

Court's Analysis:
- The court reviewed the definitions and provisions of the Unit Trust of India Act and section 73 of the Income-tax Act.
- It concluded that units are not shares and the Explanation to section 73, which applies to the purchase and sale of shares, does not apply to units.
- The Tribunal's decision to treat the loss as a business loss was upheld.

Judgment:
- The court answered the question in the affirmative, in favor of the assessee and against the Revenue.

4. Allowability of Foreign Travel Expenditure:
Key Points:
- The Tribunal allowed the deduction of foreign travel expenses incurred for the wife of the chairman-cum-managing director.
- The Revenue argued that such expenses were not for business purposes.

Court's Analysis:
- The court considered the factual findings of the Tribunal, which noted that the foreign trip was approved by the board of directors and had a business purpose.
- The court distinguished the case from other judgments where such expenses were disallowed due to personal nature.

Judgment:
- The court answered the question in the affirmative, in favor of the assessee and against the Revenue.

Summary of Judgments:
I.T.R. No. 70 of 1994:
1. Negative, in favor of the Revenue.
2. Affirmative, in favor of the assessee.
3. Affirmative, in favor of the assessee.

I.T.R. No. 43 of 1997:
1. Affirmative, in favor of the assessee.
2. Affirmative, in favor of the assessee.
3. Affirmative, in favor of the assessee.