2007 (2) TMI 105 - HC - Income Tax

Assessment u/s 115J and effect on unabsorbed assessment under normal provision of ITA- Held that the adjustment mode u/s 115J for the purpose of MAT, does not alter the amount of unabsorbed depreciation under normal provision of law

Summary

Issues:
1. Interpretation of section 115J regarding computation of book profit.
2. Treatment of unabsorbed depreciation for carry forward.

Issue 1: Interpretation of section 115J regarding computation of book profit:
The appeal involved substantial questions of law related to the computation of book profit under section 115J of the Income-tax Act. The primary issue was whether the net profit shown in the profit and loss account should be increased by all the items in the Explanation to section 115J(1A). The Tribunal held that the net profit need not be increased by all items in the Explanation. The Assessing Officer determined the unabsorbed depreciation to be carried forward after adjusting the income against the depreciation allowable. The contention was that the unabsorbed depreciation should be enhanced by an amount equal to the income assessed to tax under section 115J. The Commissioner of Income-tax (Appeals) upheld the Assessing Officer's interpretation, emphasizing the strict construction of section 115J as a deeming provision. However, the Appellate Tribunal directed the enhancement of depreciation based on a different interpretation. The final decision favored the Revenue, aligning with the apex court's view in Karnataka Small Scale Industries Development Corporation Ltd. v. CIT [2002] 258 ITR 770, which overruled previous conflicting judgments.

Issue 2: Treatment of unabsorbed depreciation for carry forward:
The second issue revolved around the treatment of unabsorbed depreciation for carry forward against subsequent years' income. The assessee argued that the unabsorbed depreciation should be increased by an amount equal to the income assessed to tax under section 115J. This argument was based on a decision by the Gauhati High Court. However, the Revenue contended that sub-section (2) of section 115J prohibits such an adjustment. The Appellate Tribunal sided with the assessee, following the Gauhati High Court's decision. Ultimately, the apex court's ruling in Karnataka Small Scale Industries Development Corporation Ltd. v. CIT [2002] 258 ITR 770 settled the matter, favoring the Revenue's interpretation and rejecting the approach taken by the Gauhati High Court.

In conclusion, the judgment clarified the interpretation of section 115J regarding book profit computation and the treatment of unabsorbed depreciation for carry forward, aligning with the apex court's decision and ruling in favor of the Revenue.