1994 (9) TMI 129 - AT - Income Tax

Summary

Issues Involved:
1. Computation of "book profit" u/s 115J.
2. Inclusion of short-term capital gain in "book profit" u/s 115J.
3. Adjustment of brought forward depreciation and loss of earlier years.

Summary:

1. Computation of "book profit" u/s 115J:
The first issue pertains to the deduction on account of depreciation in working out the book profit. The assessee-company determined the book profit at a loss by charging depreciation worked out u/s 32 of the Income-tax Act, whereas the books of accounts revealed a profit after depreciation had been deducted in accordance with the "straight-line method". The Assessing Officer found that the depreciation of Rs. 46.82 crores had no relation with the actual figures recorded in the books of account and treated the balance as a reserve, including it as part of the "book profit" in view of clause (b) of Explanation to section 115J(1A). The Commissioner of Income-tax (Appeals) upheld this view, stating that the profit and loss account must be prepared in accordance with Parts II and III of Schedule VI to the Companies Act and that the depreciation rates under the Income-tax Act were not acceptable. The Tribunal agreed, emphasizing that the computation under section 115J must be related to actual entries in the books of account on a consistent basis and subject to the adjustments stipulated by the section itself.

2. Inclusion of short-term capital gain in "book profit" u/s 115J:
The next ground questioned the inclusion of short-term capital gain as part of the "book profit" u/s 115J. The assessee relied on the decision of the Special Bench of the Tribunal in the case of Sutlej Cotton Mills Ltd., which held that capital gain was not required to be included for working out the book profit. The Tribunal agreed with the assessee, stating that the expression "book profit" was intended to be confined to business profit and not to include profit on the realization of any asset. Therefore, the Assessing Officer was directed to exclude the short-term capital gains from the computation of book profit under section 115J.

3. Adjustment of brought forward depreciation and loss of earlier years:
The last ground in the appeal involved the adjustment of brought forward depreciation and loss of earlier years. The Tribunal directed the Income-tax Officer to examine this issue while giving appeal effect to their order, but strictly within the parameters of law.

Conclusion:
The appeal was partly allowed, with the Tribunal upholding the computation of "book profit" by the Assessing Officer and Commissioner of Income-tax (Appeals), directing the exclusion of short-term capital gains from the "book profit", and instructing the Income-tax Officer to examine the adjustment of brought forward depreciation and loss of earlier years.