1991 (6) TMI 99 - AT - Income Tax

Summary

Issues Involved:
1. Reduction of book profits to nil by CIT (A).
2. Depreciation not provided in books for earlier years.
3. Application of Section 115J of the Income-tax Act.
4. Interpretation of Parts II and III of the Sixth Schedule to the Companies Act.
5. Application of Section 205 of the Companies Act.

Issue-wise Detailed Analysis:

1. Reduction of Book Profits to Nil by CIT (A):
The Revenue appealed against the decision of the CIT (A) who reduced the book profits of Rs. 29,600 to nil. The CIT (A) held that the book profits should be adjusted by the depreciation not provided in previous years, resulting in no book profits for the assessment year.

2. Depreciation Not Provided in Books for Earlier Years:
The assessee argued that depreciation was not provided in its books for the assessment years 1985-86, 1986-87, and 1987-88, amounting to Rs. 6,95,549, against which the book profits before depreciation were Rs. 2,52,994. The assessee contended that under Section 115J, book profit is the net profit shown in the profit and loss account prepared in accordance with the Companies Act, and should be reduced by business loss or depreciation before declaring any dividend.

3. Application of Section 115J of the Income-tax Act:
Section 115J, inserted by the Finance Act, 1987, mandates that if the total income of a company is less than 30% of its book profit, the total income chargeable to tax shall be deemed to be 30% of such book profit. The Explanation to Section 115J defines "book profit" as the net profit shown in the profit and loss account, increased by specific amounts and reduced by certain amounts, including the amount of loss or depreciation required to be set off against the profit of the relevant previous year.

4. Interpretation of Parts II and III of the Sixth Schedule to the Companies Act:
Parts II and III of the Sixth Schedule to the Companies Act detail the requirements for the profit and loss account and the interpretation of terms such as "provision" and "reserve." Part II requires disclosure of the amount provided for depreciation or a statement of arrears of depreciation if no provision is made. The interpretation section defines "provision" as any amount written off or retained for depreciation, renewals, or diminution in value of assets.

5. Application of Section 205 of the Companies Act:
Section 205 of the Companies Act stipulates that no dividend shall be declared except out of profits arrived at after providing for depreciation. Clause (b) of the first proviso to sub-section (1) of Section 205 requires that if a company has incurred a loss in any previous financial year, the amount of the loss or the amount provided for depreciation, whichever is less, shall be set off against the profits of the company for the year for which the dividend is proposed. Sub-section (2) of Section 205 specifies the methods for providing depreciation, including a basis approved by the Central Government.

Judgment:
The Tribunal concluded that the assessee had not claimed depreciation for earlier years and noted that the company had provided depreciation during the year on the written-down value as on 31-10-1986. The Tribunal held that the assessing officer's order complied with Section 115J, and the assessee could not claim set-off of earlier years' depreciation in computing the book profit. Consequently, the order of the first appellate authority was reversed, and the assessing officer's order was restored. The Revenue's appeal was allowed.