2014 (11) TMI 896 - HC - Income Tax

Computation of MAT - Additional depreciation debited Retrospective effect in change in the method of providing depreciation - Whether the Tribunal was right in deleting the addition made by the AO to the book profit on account of additional depreciation debited in the accounts for the earlier years because of change in the method of providing depreciation retrospectively Held that - Following the decision in DCIT Versus Farmson Pharmaceuticals Guj Ltd. 2011 (4) TMI 1037 - Gujarat High Court - the short fall in the depreciation, was charged to the Profit & Loss Account, which was computed in accordance with the provisions of the Companies Act in Apollo Tyres Ltd. vs. Commissioner of Income Tax 2002 (5) TMI 5 - SUPREME Court it has been held that the AO, while computing the income u/s 115J, 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 has the limited power to make increases and reductions as provided for in the Explanation to the section - the AO does not have the jurisdiction to go behind the net profits shown in the Profit & Loss account except to the extent provided in the Explanation to section 115J - subsection (1A) of section 115J does not empower the AO to embark upon a fresh enquiry in regard to the entries made in the books of account of the company the Tribunal was right in law in upholding the deletion of addition made by the AO to the book profit on account of additional depreciation debited in the books for the earlier years because of change in the method of providing depreciation retrospectively Decided against revenue.

Summary

Issues Involved:

1. Deletion of addition to book profit on account of additional depreciation due to change in the method of providing depreciation retrospectively.
2. Charging of interest under sections 234B and 234C of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Deletion of Addition to Book Profit on Account of Additional Depreciation:

The primary issue was whether the Income Tax Appellate Tribunal was correct in upholding the order of the Commissioner of Income Tax (Appeals) [CIT(A)] which deleted the addition of Rs. 96,67,300 made by the Assessing Officer (AO) to the book profit. This addition was due to additional depreciation debited in the accounts for earlier years because of a retrospective change in the method of providing depreciation.

The assesse-company, engaged in the manufacture of filaments, had changed its method of providing depreciation from the Straight Line Method (SLM) to the Written Down Value (WDV) Method. This change resulted in a shortfall in the depreciation provided as per the old method compared to the new method, and the shortfall was charged to the Profit and Loss Account for the assessment year 1989-90. The AO disallowed the claim based on Section 205 of the Companies Act, 1956, read with Section 35D, and relied on the Supreme Court decision in McDowell and Co. Ltd. vs. Commercial Tax Officer.

Upon appeal, the CIT(A) upheld the assesse's contention, directing the AO to recompute the book profit without disallowing the additional depreciation. The CIT(A) found that the change in method was permitted by Accounting Standards and not barred by the Companies Act or Section 115J of the Income Tax Act. The Tribunal also upheld the CIT(A)'s decision, noting that the change in accounting method was in accordance with the standards issued by the Institute of Chartered Accountants.

The High Court referenced a similar case, Commissioner of Income Tax vs. Rubamin (P) Ltd., where the Supreme Court's decision in Apollo Tyres Ltd. vs. Commissioner of Income Tax was applied. The Supreme Court had held that the AO, while computing income under Section 115J, could only examine whether the books of account were certified by the authorities under the Companies Act and had limited power to make increases and reductions as provided in the Explanation to Section 115J. The AO did not have the jurisdiction to go behind the net profits shown in the Profit and Loss account except as provided in the Explanation to Section 115J.

The High Court concluded that the issue was covered by the Supreme Court's decision in Apollo Tyres Ltd. and the High Court's decision in Rubamin (P) Ltd., thus ruling in favor of the assesse.

2. Charging of Interest Under Sections 234B and 234C:

The second issue was whether the Tribunal was correct in upholding the CIT(A)'s order directing not to charge interest under Sections 234B and 234C of the Income Tax Act since the total income was determined under Section 115J.

The High Court referred to the Supreme Court's decision in Commissioner of Income Tax vs. Kwality Biscuits Ltd., which confirmed the Karnataka High Court's ruling. The Karnataka High Court held that the liability for payment of advance tax under Section 234B and 234C arises only if the assessee is liable to pay advance tax under Section 208. Under Section 115J, the total income of the company is deemed to be an amount equal to 30% of its book profit if it is less than 30% of the book profit. This determination can only be made after the end of the relevant assessment year, thus the provisions of Sections 207, 208, 209, or 210 cannot be applied until the accounts are audited and the balance sheet is prepared.

The High Court concluded that the controversy was settled by the Supreme Court's decision in Kwality Biscuits Ltd., ruling that the Tribunal was correct in upholding the CIT(A)'s order not to charge interest under Sections 234B and 234C.

Conclusion:

The High Court dismissed the appeal, ruling in favor of the assesse on both issues. The deletion of the addition to book profit on account of additional depreciation was upheld, and the decision not to charge interest under Sections 234B and 234C was affirmed.