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TMI Blog1998 (6) TMI 111X X X X Extracts X X X X X X X X Extracts X X X X ..... to be assessed to tax under section 115J of the Income-tax Act. Accordingly, he determined the book profit at Rs. 47,85,820 and determined the income chargeable to tax at 30% thereof. 3. The first ground raised in this appeal is concerned with the computation of the taxable income under section 115J. In the annual accounts for the year ending 30th September, 1987 the assessee prepared the profit and loss account as under : Schedule Rs. Rs. Income Sales and other income N 12,30,56,923 Expenditure Excise Duty paid 39,52,808 Manufacturing, Administrative and other Expenditure O 11,40,54,793 Depreciation F 14,34,565 --------------- 11,94,42,166 Profit for the period before tax 36,14,757 Provision for taxation. 5,43,000 Prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the book profit for the purpose of section 115J the sum of Rs. 11,71,063 credited in the profit and loss account should be excluded as the credit was on account of excess provision for depreciation relating to earlier years. The assessee's claim was that the excess depreciation provided in the accounts for the earlier years and written back to the profit and loss account for the year ending 30th September, 1987 did not form part of the net profit for the current year. The Assessing Officer did not agree and he included the sum of Rs. 11,71,063 in the book profit and computed the chargeable income under section 115J on that basis. In the assessee's appeal the CIT(Appeals) held that from the book profit adjustments were permitted only as pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excess provision relating to the earlier years was not part of the profit of the current year and so it was not includible in the net profit of the business even though the same was credited in the profit and loss account. Shri Satyanarayanan raised another contention that in any case the excess provision for depreciation credited in the profit and loss account was deductible from the book profit under clause (i) of the Explanation. The learned representative submitted that depreciation was nothing but a provision created by setting aside amounts out of the profits, for the diminution in the value of assets. Drawing our attention to clause (i) Shri Satyanarayanan contended that the sum of Rs. 11,71,063 withdrawn from the provision for depr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edule to the Companies Act, 1956 as increased by the amounts mentioned in clauses (a) to (f) and as reduced by the amounts in clauses (i), (ii) and (iii). The assessee-company has prepared the profit and loss account previous year relevant for the assessment year 1988-89 in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act. It was obligatory on the part of the assessee to provide for adequate depreciation before the net profit was ascertained. Prior to the Companies (Amendment) Act, 1988, depreciation had been provided as per the rates prescribed in the Income-tax Act from time to time in the diminishing balance method. But this year the assessee changed the method to claim depreciation on straight lie m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. [1996] 219 ITR 388 / 85 Taxman 296 where the distinction between a 'provision' and a 'reserve' is shown as follows : "The distinction between a provision and a reserve is in commercial accountancy fairly well-known. Provisions made against anticipated losses and contingencies are charges against profits and, therefore, to be taken into account against gross receipts in the P L account and the balance sheet. On the other hand, reserves are appropriation of profits, the assets by which they are represented being retained to form part of the capital employed in the business. Provisions are usually shown in the balance sheet by way of deductions from the assets in respect of which they are made, whereas general reserves and reserve funds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f assets, is included in the definition of 'provision' and so the excess amount of depreciation provided for in the earlier years would qualify under clause (1) of the Explanation to section 115J, for reduction as the amount withdrawn from reserves or provision, if any such amount is credited to the profit and loss account. The sum of Rs. 11,71,063 credited to the P L account is to be, therefore, reduced, to arrive at the book profit for the purpose of section 115J. We agree with the learned representative of the assessee that the CIT(Appeals) was not correct in holding that the book profit is not to be reduced by the excess provision of depreciation credited in the profit and loss account. We accordingly reverse the order of the CIT(Appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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