1994 (8) TMI 69 - AT - Income Tax

Issues Involved:
1. Validity of reassessment proceedings under Section 147 of the IT Act.
2. Quantum of depreciation to be adjusted against book profits under Section 115J.
3. Deduction under Section 80HHC from book profits.
4. Inclusion of profit on the sale of capital assets in computing book profits.

Issue-wise Detailed Analysis:

1. Validity of Reassessment Proceedings under Section 147 of the IT Act:
The assessee, a private limited company, failed to file a return of income within the stipulated time under Section 139(1) and subsequent notices under Sections 139(2) and 142(1). The Assessing Officer (AO) noted on 31st October 1989, that the assessment may be closed as 'N.A.' for statistical purposes due to no taxable income from 1984-85 onwards. The assessee later filed a return on 15th March 1990, disclosing a loss of Rs. 59,02,550. The AO reopened the assessment on 9th January 1992, under Section 147(b), stating that income assessable under Section 115J had escaped assessment. The CIT(A) upheld the reopening, stating that no assessment had been made despite the notices, and the profits chargeable to tax under Section 115J had escaped assessment. The Tribunal upheld the reopening of the assessment under the amended provisions of Section 147, noting that the AO had applied his mind to the past records and concluded that there was no taxable income, thus amounting to an order under Section 144. The Tribunal rejected the contention that the amended provisions of Section 147, effective from 1st April 1989, would not apply to the assessment year 1988-89, stating that Section 147 is a procedural provision and retrospective in effect.

2. Quantum of Depreciation to be Adjusted Against Book Profits under Section 115J:
The AO quantified the depreciation to be allowed in a sum of Rs. 5,18,387, which was upheld by the CIT(A). The assessee contended that the computation should start from the assessment year 1970-71 onwards and that there was an error in adjusting the loss or depreciation for the assessment years 1981-82 and 1982-83. The Tribunal held that the option favorable to the assessee could be adopted, allowing the assessee to set off the amount of loss or depreciation, whichever is less, against the profits of the year ending on 30th September 1987, relevant to the assessment year 1988-89. The Tribunal directed the AO to verify the computation and quantify the amount of loss or depreciation accordingly.

3. Deduction under Section 80HHC from Book Profits:
The AO held that the deduction under Section 80HHC would be permissible only from the assessment year 1989-90 and not before, which was upheld by the CIT(A). The Tribunal agreed with the authorities, stating that the deduction under Section 80HHC could not be made from the book profits for the assessment year 1988-89, as the relevant provisions were effective from 1st April 1989.

4. Inclusion of Profit on the Sale of Capital Assets in Computing Book Profits:
The CIT(A) upheld the inclusion of the profit on the sale of a capital asset amounting to Rs. 66,242 in computing the book profit, as it was noted in the P&L account prepared as per Schedule VI of the Companies Act, 1956. The Tribunal concurred, stating that the profit on the sale of an asset shown in the P&L account should be reckoned for the purpose of computing book profits under Section 115J, which overrides other provisions of the IT Act.

Conclusion:
The appeal was partly allowed, upholding the reassessment proceedings, directing the AO to recompute the depreciation adjustment, denying the deduction under Section 80HHC for the assessment year 1988-89, and including the profit on the sale of capital assets in the book profits.

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