2007 (3) TMI 160 - HC - Income Tax

Book profits Revenue contended that while computing book profit u/s 115J of the Act, the unabsorbed depreciation/business loss of earlier years adjusted against the profit earned in some of the intervening years Held matter in favour of revenue

Summary

Issues:
1. Interpretation of Section 115J of the Income Tax Act regarding computation of book profit.
2. Adjustment of unabsorbed depreciation/business loss against profits earned in intervening years.
3. Validity of rectification under Section 154 of the Income Tax Act.
4. Applicability of previous court judgments on similar issues.

Issue 1: Interpretation of Section 115J of the Income Tax Act regarding computation of book profit:
The judgment pertains to an appeal against the order of the Income Tax Appellate Tribunal concerning the computation of book profits under Section 115J of the Income Tax Act. The court analyzed whether unabsorbed depreciation/business loss of earlier years should be considered without adjusting the profits earned in intervening years against the losses of other years. The court referred to the provisions of Section 115J(1) and (2) of the Act and emphasized that the determination of amounts to be carried forward should be made as per the normal provisions of the Act, without any interruption in the process. The court held that the unabsorbed depreciation/business loss should not be taken without adjusting the profits earned in intervening years, as it would not align with the continuous process of carry forward and set off as envisaged by the Act.

Issue 2: Adjustment of unabsorbed depreciation/business loss against profits earned in intervening years:
The court examined the case of an assessee company engaged in the manufacture of yarn, where the assessment under Section 143(3) of the Act resulted in a mistake in the computation of profits under Section 115J. The court noted that the Assessing Officer reworked the unabsorbed depreciation/business loss, leading to a revised tax amount. On appeal, the Commissioner of Income Tax (Appeals) provided partial relief to the assessee by accepting their contention that adjustments of profits for assessment years should not be made against losses/depreciation from subsequent periods. This decision was confirmed by the Tribunal, prompting the present appeal. The court ultimately ruled in favor of the Revenue, emphasizing that the unabsorbed depreciation/business loss should be adjusted against profits earned in intervening years for accurate computation of book profit under Section 115J.

Issue 3: Validity of rectification under Section 154 of the Income Tax Act:
The judgment also addressed the validity of the rectification under Section 154 of the Income Tax Act, which was initiated due to a mistake in the assessment order regarding the computation of profits under Section 115J. The assessee objected to the proposed rectification, arguing that the loss or depreciation, whichever is less as per the books, should be considered. However, the Assessing Officer reworked the unabsorbed depreciation/business loss, leading to a revised tax amount. The court's analysis focused on the correct interpretation of the provisions of the Act concerning rectification and computation of book profit under Section 115J.

Issue 4: Applicability of previous court judgments on similar issues:
The court referenced a previous judgment in CIT v. Fab Exports P. Ltd. [2002] 258 ITR 56, which provided insights into the interpretation of Section 115J of the Income Tax Act. The court highlighted that the determination of amounts to be carried forward should align with the normal provisions of the Act, ensuring a continuous process without interruptions. By relying on this precedent, the court concluded that the unabsorbed depreciation/business loss should be adjusted against profits earned in intervening years for accurate computation of book profit. The court's decision was guided by established legal principles and interpretations of relevant provisions of the Income Tax Act.

In conclusion, the judgment clarified the interpretation of Section 115J of the Income Tax Act, emphasizing the need to adjust unabsorbed depreciation/business loss against profits earned in intervening years for the accurate computation of book profit. The court's analysis addressed various legal issues, including rectification under Section 154 and the applicability of previous court judgments on similar matters, providing a comprehensive understanding of the case.