2007 (4) TMI 238 - HC - Income Tax

Whether Tribunal was justified in holding that loss mentioned in clause (b) of the first proviso of Sec. 205(1) of Companies Act, read with section 115J of the Income-tax Act does not include unabsorbed depreciation Held, no - Tribunal is wrong in refusing to take into account unabsorbed depreciation while working out the book profit - Tribunal has also committed error by holding that the loss cannot be taken into consideration after providing for depreciation assessee s appeal allowed

Summary

Issues:
Interpretation of the term 'loss' in clause (b) of the first proviso to sub-section (1) of section 205 of the Companies Act, 1956 in relation to unabsorbed depreciation.

Analysis:
The judgment delivered by the High Court of PUNJAB AND HARYANA delves into the interpretation of the term 'loss' in the context of clause (b) of the first proviso to sub-section (1) of section 205 of the Companies Act, 1956, specifically concerning unabsorbed depreciation. The case revolves around an application made by the assessee seeking reference of legal questions arising from an order dated December 31, 1996, related to the assessment year 1989-90. The primary question referred to the court was whether the Tribunal was justified in holding that 'loss' mentioned in the clause does not include 'unabsorbed depreciation.'

The assessee had initially declared a loss, including brought forward losses and allowances. However, the Assessing Officer disallowed the deduction of earlier years' allowances, leading to a dispute. The Tribunal upheld the Assessing Officer's view, stating that brought forward loss or unabsorbed depreciation, whichever is less, should be considered while computing book profits. The court analyzed the provisions of section 115J of the Income-tax Act, 1961, and the Companies Act, emphasizing the significance of considering unabsorbed depreciation in determining book profits.

The judgment also referenced the decision of the Supreme Court in the case of Surana Steels P. Ltd. v. Deputy CIT, highlighting that the term 'loss' in the proviso to section 205(1) of the Companies Act should be understood as the amount arrived at after taking into account depreciation. The court emphasized that the Tribunal erred in not considering unabsorbed depreciation while calculating book profits, contrary to the interpretation provided by the Supreme Court. Consequently, the court ruled in favor of the assessee, stating that the reference should be answered in favor of the assessee and against the Revenue.

In conclusion, the judgment provides a detailed analysis of the legal interpretation of the term 'loss' in the context of unabsorbed depreciation, highlighting the importance of considering depreciation in computing book profits under the relevant provisions of the Income-tax Act and the Companies Act. The decision aligns with the interpretation provided by the Supreme Court, emphasizing the need to include unabsorbed depreciation in determining 'loss' for the purpose of taxation.