2011 (8) TMI 516 - HC - Income Tax

Depreciation - Whether the Tribunal was right in holding that the depreciation of the previous years should be deducted for arriving at the book profits u/s 115J even though such depreciation was not carried forward? - The assessee showed NIL as regards the carry forward of loss and unabsorbed depreciation rightly the Commissioner of Income Tax revised the order of the officer to take the entire book profit of Rs.11, 22, 65, 758/- without any further adjustments for the purpose of working out 30% profit u/s 115J of the Income Tax Act 1961 - Thus even though the assessee contended that mere adjustment as against the general reserve by itself would not defeat the claim of the assessee for considering the unabsorbed declaration in computation of the profit for the next year in terms of Section 205(1) (b) yet the fact remains that when the accounts were made up for the assessment year 1989-1990 the loss and unabsorbed depreciation remained NIL - On the factual position that the assessee had no unabsorbed loss or unabsorbed depreciation to be carried forward for any consideration in the year under consideration rightly the Commissioner of Income Tax gave the direction which is in accordance with the provisions of the Act as well as the Income Tax Act 1961 - the order of the Tribunal is set aside - The Tax case Revision is allowed.

Summary

Issues:
1. Interpretation of Section 115J of the Income Tax Act, 1961 regarding deduction of depreciation for arriving at book profits.
2. Revisional proceedings under Section 263 initiated by the Commissioner of Income Tax.
3. Consideration of unabsorbed depreciation and loss in the computation of profit and loss for assessment year 1989-1990.
4. Discrepancy in the treatment of unabsorbed depreciation and loss by the Tribunal and the Revenue.
5. Application of Section 205(1) of the Companies Act in determining carry forward of loss and unabsorbed depreciation.

Issue 1:
The central issue in this case revolves around the interpretation of Section 115J of the Income Tax Act, 1961, specifically regarding the deduction of depreciation for arriving at book profits. The Tribunal had to determine whether the unabsorbed depreciation of previous years should be deducted for calculating the book profits under Section 115J, even if such depreciation was not carried forward.

Issue 2:
Under Section 263 of the Income Tax Act, 1961, the Commissioner of Income Tax initiated revisional proceedings, contending that the Assessing Officer's order was prejudicial to the revenue's interest. The Commissioner highlighted discrepancies in the treatment of unabsorbed depreciation and loss, particularly in relation to the balance sheet of the company for the relevant period.

Issue 3:
The assessment year 1989-1990 saw a dispute regarding the consideration of unabsorbed depreciation and loss in the computation of profit and loss. The assessee argued that the unabsorbed depreciation should be deducted in line with Section 115J of the Income Tax Act, 1961, while the Revenue contested this based on the balance sheet's information.

Issue 4:
The Tribunal's decision favored the assessee's position, emphasizing that the depreciation should be deducted as the loss incurred was higher than the depreciation amount. The Tribunal disagreed with the Revenue's interpretation and cited relevant case law to support its decision, leading to the Revenue's appeal against this decision.

Issue 5:
The application of Section 205(1) of the Companies Act was crucial in determining the carry forward of loss and unabsorbed depreciation. The Revenue argued that since there was no loss to be carried forward due to adjustments made in the previous year, the Tribunal erred in accepting the assessee's claim regarding the unabsorbed depreciation.

In conclusion, the High Court of Madras set aside the Tribunal's order, ruling in favor of the Revenue's interpretation based on the balance sheet's information and the absence of unabsorbed loss or depreciation for the relevant year. The Court upheld the Commissioner of Income Tax's direction as being in accordance with the provisions of the Income Tax Act, 1961.