1993 (6) TMI 106 - AT - Income Tax

Summary

Issues Involved:
1. Computation of Book Profit u/s 115J of the Income-Tax Act, 1961.
2. Depreciation rates applicable for computing book profits.
3. Jurisdiction of the Assessing Officer to recast the profit and loss account.

Summary:

Issue 1: Computation of Book Profit u/s 115J of the Income-Tax Act, 1961
The primary issue is the computation of book profit u/s 115J, where the Assessing Officer determined 30% of the book profits at Rs. 47,43,691, contrary to the NIL book profit declared by the assessee. Section 115J mandates that if the total income is less than 30% of the book profit, the total income chargeable to tax shall be deemed to be 30% of such book profit.

Issue 2: Depreciation Rates Applicable for Computing Book Profits
The dispute centers on the depreciation rates used for the second period (1-10-1988 to 31-3-1989) of the previous year. The assessee used depreciation rates as per Income-tax Rules, while the Assessing Officer used rates from Schedule XIV of the Companies Act, 1956. The CIT (A) upheld the Assessing Officer's view, stating that the rates in Schedule XIV are applicable for computing book profits for dividend distribution and managerial remuneration purposes. However, the Tribunal found that Schedule XIV rates are minimum rates and higher rates are permissible with proper disclosure, as clarified by Circular No. 2 of 1989 from the Department of Company Affairs. The Tribunal concluded that the assessee's use of higher depreciation rates was justified and in accordance with Parts II and III of Schedule VI to the Companies Act, 1956.

Issue 3: Jurisdiction of the Assessing Officer to Recast the Profit and Loss Account
The Tribunal held that the Assessing Officer has no authority to recast the profit and loss account if it is prepared in accordance with Parts II and III of Schedule VI to the Companies Act, 1956. This is supported by the Special Bench decision in Sutlej Cotton Mills Ltd. v. Asstt. CIT, which states that the Assessing Officer cannot disturb the book profit except as provided in section 115J.

Conclusion:
The Tribunal directed that the depreciation rates as per Income-tax Rules adopted by the assessee for the period 1-10-1988 to 31-3-1989 should be accepted, and the book profits should be computed accordingly for the purpose of section 115J. The Tribunal found no merit in the Department's argument that the higher depreciation rate was a device to avoid tax, noting that the method was consistently followed in subsequent years.