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TMI Blog1993 (12) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment)-III, Hyderabad, Deputy Commissioner of Income-tax (Assessments), Special Range-3, Hyderabad, and the Assistant Commissioner of Income-tax, Investigation Circle-I(1), Hyderabad, respectively, on behalf of the Department, for a writ of certiorari or order or direction, to call for the records relating to I. T. A. No. 1845/(Hyd) of 1990, for the assessment year 1988-89, I. T. A. No. 822/(Hyd) of 1992 for the assessment year 1989-90 and I. T. A. No. 811/(Hyd) of 1992 for the assessment year 1988-89, respectively, passed by the Income Appellate Tribunal, Hyderabad Special Bench, Hyderabad, dated February 4, 1993, and quash the order of the Special Bench. Messrs. Surana Steels Pvt. Ltd., Secunderabad (first respondent in W. P. No. 5408 of 1993), Messrs. Binjusaria Metal Box Co. (Pvt.) Ltd., Hyderabad (first respondent in W. P. No. 6102 of 1993) and Messrs. Agroha Extraction Ltd., Hyderabad (first respondent in W. P. No. 6141 of 1993) are the appellants-assessees in the above three income-tax appeals. The Income-tax Appellate Tribunal, Hyderabad Special Bench, disposed of all the three appeals by common order dated February 4, 1993, as they involved consideration of common questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... --------------------------------------------------------------------------------------------------------------------------------------------------- Assessment Profit/loss Depreciation debited to year P & L account --------------------------------------------------------------------------------------------------------------------------------------------------- Rs. Rs. 1987-88 (+) 3,087 - 1988-89 (+) 35,79,997 67,75,759 (profit before depreciation) (-) 31,95,762 (loss after depreciation) 1989-90 (+) 28,37,947 3,534 --------------------------------------------------------------------------------------------------------------------------------------------------- The assessee-company had filed its return of income disclosing "nil" income after setting off a part of arrears of depreciation against the current year's profit of Rs. 28,37,947. The contention of the assessee was that for the accounting year relevant to the assessment year under consideration, there was no book profit after adjustment of the earlier years' loss against the current year's profit. The Income-tax Officer, however, computed the book profit under section 115J of the Income-tax Act at Rs. 8,51, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nch of the Hyderabad Bench. Both the Benches dealt with the interpretation of section 115J of the Income-tax Act. If a Division Bench of the Tribunal considers a decision of the single member and comes to a different view, the decision of the single member stands overruled, if not reversed. The exposition of law of the Division Bench prevails over the single member. Therefore, the reason for the constitution of the Special Bench is a non-existing ground. Therefore, according to the Department, the very constitution of the Special Bench was contrary to the established practice. Reference to a Special Bench is to be made only if another Division Bench considers that the earlier decision of the Tribunal requires reconsideration or there were conflicting decisions of the different Benches, without considering the other decisions. The Income-tax Appellate Tribunal has no power to constitute a Special Bench according to its whims, but the same has to be guided by some parameters and established practice. Therefore, according to the Department, the decision of the President to constitute a Special Bench was in total violation of well-settled principles of law. Therefore, reference of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee on January 5, 1993. Sri Mani requested the Tribunal that the petitioner being the designated officer should be allowed to present the view-point in regard to certain matters which he was not in a position to argue by way of illustrations and workings of the provisions of section 115J of the Act and time should be given for the said purpose. The Tribunal refused the same. As an alternative, it was requested that the petitioner should be allowed to submit his arguments in writing as he was not in a position to argue the matter and those written submissions may be taken on record. The said request was also rejected by the Tribunal. On January 13, 1993, a miscellaneous petition was filed requesting the Appellate Tribunal to post the case for further hearing so that the Department could have the opportunity of assisting the Tribunal properly and effectively, but no action was taken by the Tribunal on the said petition. The Assistant Registrar of the Income-tax Appellate Tribunal requested the petitioner to submit the workings prepared by him which he submitted accordingly. The Department requested the Tribunal to post the case for further hearing which was not considered by the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice is untenable. It is further stated in the counter-affidavit that Mr. Mani himself volunteered to argue the matter. As regards the power of the Tribunal to constitute a Special Bench, it is stated in the counter-affidavit that it is within the discretion of the President as to when a Special Bench is to be constituted and there are no conditions set out in the statute as to when it is to be constituted. The Tax Bar Association of Andhra Pradesh has made a representation on July 25, 1992, stating that there are conflicting decisions of the Tribunal in Buttwelded Tools (P.) Ltd. v. Asst. CIT [1991] 39 ITD 432 (ITAT, Mad) and V. V. Trans-Investments (P.) Ltd. v. ITO [1992] 42 ITD 242 (ITAT, Hyd) in regard to the interpretation of section 115J of the Income-tax Act and, therefore, requested the President of the Tribunal to constitute a Special Bench for authoritative pronouncement on the matter. It is also stated that the decision of the single member in Buttwelded Tools (P.) Ltd. v. Asst. CIT [1991]39 ITD 432 (ITAT, Mad) was followed by two other Benches of the Tribunal, Bombay Tribunal in I. T. A. No. 8606/(Bom) of 1991 dated June 21, 1992, and I. T. A. No. 1437/(Bom) of 1992 dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred. It is well-settled that the High Court may decline to answer a question of fact or a question of law which is purely academic or has no bearing on the dispute between the parties or though referred by the Tribunal does not arise out of its order. The High Court may also decline to answer a question arising out of the order of the Tribunal, if it is unnecessary or irrelevant or is not calculated to dispose of the real issue between the taxpayer and the Department. There is also no ground for restricting that power when by an erroneous order the High Court has directed the Tribunal to state a case on a question which does not arise out of the order of the Tribunal. At the hearing of a reference pursuant to an order calling upon the Tribunal to state a case, the High Court is not bound to answer the question without considering whether it arises out of the order of the Tribunal, whether it is a question of law, or whether it is academic, unnecessary or irrelevant." The next decision relied upon is a decision of this court in K. Ch. Venkataratnam v. CGT [1974] 95 ITR 277, wherein it was held thus (headnote) : "If a party fails to appear or take any interest in the reference m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essments of various companies. Having regard to the fact that the question of law is an important one and having wider ramifications, it is just and necessary that the issue may be decided by this court at the earliest. Therefore, the issue involved in R. C. No. 126 of 1992 had not become academic, and in fact, is an issue material for decision in the petitioner's case in I. T. A. No. 929/(Hyd) of 1993. Under those circumstances, the petitioner cannot be permitted to withdraw the reference. In view of the above, the question that arises for consideration is, whether the court is bound to answer the reference on the facts and circumstances of the case. In Anusuya Devi's case [1968] 68 ITR 750, the Supreme Court referred to the circumstances under which the High Court is not bound to answer the reference, according to which, if the question of fact or question of law is purely academic and has no bearing on the dispute between the parties, or if it is unnecessary or irrelevant or is not calculated to dispose of the real issue between the taxpayer and the Department, the High Court is not bound to answer the question. That was a case where the very basis of the question of which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the complicated nature of the case and the heavy revenue involved in the matter and also keeping in view that any decision rendered by the Special Bench of the Tribunal will have an all India effect, to supplement the arguments of Sri Mani, the Department sought permission of the Tribunal to file written submissions. It is not disputed that the Tribunal did not permit the Departmental Representative to file their written submissions. Admittedly, Sri Srinivasulu who was instructed to appear in the matter could not appear on behalf of the Department and do justice to the case. It may be that Mr. Mani might have argued the matter ably, but the fact remains that the Department could not project its case in its proper perspective. Further, there is no reason why the Departmental Representative should not have been permitted by the Tribunal to file the written submissions. The written submissions will only supplement the arguments already advanced by the Deputy Commissioner of Income-tax, Sri Mani, and will assist the Tribunal in arriving at the correct conclusions. Further, on the face of it, the attitude of the Tribunal in not permitting the Departmental Representative to file the writ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artment is that there was no occasion for the President to constitute a Special Bench under section 255(3) of the Act as there is no conflict between the two decisions of the Madras Bench and Hyderabad Bench. The reason for the constitution of the Special Bench with three members, according to the President, was that there is a conflict of opinion between the decision of the single member of the Madras Bench (Buttwelded Tools (P.) Ltd. v. Asst. CIT [1991] 39 ITD 432) and the decision of the Division Bench of the Hyderabad Income-tax Appellate Tribunal (V. V. Trans-Investments (P.) Ltd. v. ITO [1992] 42 ITD 242) in regard to the interpretation of section 115J of the Income-tax Act. The reason given for the constitution of the Special Bench that there was a conflict of opinion between Buttwelded Tools (P.) Ltd. v. Asst. CIT [1991] 39 ITD 432 (ITAT, Mad) and V. V. Trans-Investments (P.) Ltd. v. ITO [1992] 42 ITD 242 (ITAT, Hyd)) is not relevant as the decision of the single member of the Appellate Tribunal will get automatically overruled by the decision of the Division Bench and the order of the Division Bench alone will prevail. Therefore, there was no occasion for the constitution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39 ITD 432 was a decision rendered by a single member of the Madras Bench of the Appellate Tribunal, whereas the decision in V. V. Trans-Investments P. Ltd. v. ITO [1992] 42 ITD 242 was a decision rendered by a Division Bench of the Hyderabad Bench of the Appellate Tribunal. Therefore, the decision of the Division Bench of the Appellate Tribunal of Hyderabad Bench will prevail over the decision of the single member of the Madras Bench of the Appellate Tribunal. Articles written by various authors in the magazines cannot be the basis for making a reference to the Special Bench, as each author may express his own view and, on that basis, the President cannot exercise the power to refer the matter to. Special Bench. Therefore, on the facts of this case, the constitution of the Special Bench, was on non-existing ground. We are of the view that the exercise of power by the President in constituting a Special Bench was arbitrary and unreasonable. As already stated, the power to constitute Special Bench under section 255(3) of the Act shall be exercised judiciously and judicially and the discretion cannot be exercised arbitrarily at the whims and fancies of the authority vested with such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee being a company other than a company engaged in the business of generation or distribution of electricity, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1988, but before the 1st day of April, 1991 (hereafter in this section referred to as the relevant previous year), is less than thirty per cent. of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent. of such book profit. (1A) Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956). Explanation.-For the purpose of this section,`book profit' means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (1A), as increased by-..... if any amount referred to in clauses (a) to (f) is debited or, as the case may be, the amount referred to in clauses (g) and (h) is not cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preparation of balance-sheet in horizontal form and Part II-B deals with the preparation of balance-sheet in vertical form. Part II deals with the requirements of profit and loss account. One of the items to be shown in the profit and loss account is "depreciation" which is one of the items of fixed assets. Section 205(1), first proviso, clause (b) which is relevant for the purpose of calculating the net profit reads as follows : "205. (1) No dividend shall be declared or paid by a company for any financial year except out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2) or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with those provisions and remaining undistributed or out of both or out of moneys provided by the Central Government or a State Government for the payment of dividend in pursuance of a guarantee given by that Government Provided that-.... (b) if the company has incurred any loss in any previous financial year or years, which falls or fall after the commencement of the Companies (Amendment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al income of a company is not taxable in the normal circumstances, having regard to the fiction created in the section, thirty per cent. of the book profit is liable to be taxed. Under clause (iv) of the Explanation, the book profits so prepared shall be reduced by the amount of the loss or the amount of depreciation which would be required to be set off against the profit of the relevant previous year as if the provisions of section 205(1), first proviso, clause (b) of the Companies Act are applicable. From the above, it is clear that the intention of the Legislature is to incorporate section 205(1), first proviso, clause (b) in section 115J of the Income-tax Act. The effect of this legislative method would amount to incorporation by reference of the provisions of Parts II and III of Schedule VI and section 205(1), first proviso, clause (b) of the Companies Act. In this connection, we may refer to the judgment of the Supreme Court in Bolani Ores Ltd. v. State of Orissa. AIR 1975 SC 17, wherein the learned judges observed thus (headnote) : "If the Orissa Motor Vehicles Taxation (Amendment) Act, 1943, incorporating the definition of 'motor vehicles' referred to the definition of 'm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by incorporation is a common legislative device employed by the Legislature, where the Legislature for convenience of drafting incorporates provisions from an existing statute by reference to that statute instead of setting out for itself at length the provisions which it desires to adopt. Once the incorporation is made, the provision incorporated becomes an integral part of the statute in which it is transposed and thereafter there is no need to refer to the statute from which the incorporation is made and any subsequent amendment made in it has no effect on the incorporating statute." The learned judges referred to the observations made by Lord Esher M. R. in Wood's Estate, In re [1886] 31 Ch D 607, 615 (CA), which were to the following effect (at page 440 of 49 Comp Cas) : "If a subsequent Act brings into itself by reference, some of the clauses of a former Act, the legal effect of that, as has often been held, is to write those sections into the new Act just as if they had been actually written in it with the pen, or printed in it, and, the moment you have those clauses in the later Act, you have no occasion to refer to the former Act at all. " The learned judges also refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Sales Tax Act, 1956 (Central Act 74 of 1956). Section 4 of the Central Sales Tax Act reads as follows : "4. When is a sale or purchase of goods said to take place outside a State.-(1) Subject to the provisions contained in section 3, when a sale or purchase of goods is determined in accordance with sub-section (2) to take place inside a State, such sale or purchase shall be deemed to have taken place outside all other States. (2) A sale or purchase of goods shall be deemed to take place inside a State, if the goods are within the State (a) in the case of specific or ascertained goods, at the time the contract of sale is made ; and . . . . " Considering the scope of Explanation II to sub-section (o) of section 2, it was held that (at page 415) : "...... The State Legislature could have very well reproduced the entire language of sub-section (2) of section 4 bodily in Explanation II to sub-section (o) of section 2, but it preferred to employ a simpler device by incorporating by reference the provisions of sub-section (2) of section 4 in Explanation II to sub-section (o) of section (2). The doctrine of incorporation by reference has been succinctly explained by Lord Esher M. R. i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Act. Before considering this, we may refer to the object and background under which section 115J came to be enacted. Section 115J was introduced in the assessment year 1988-89. Prior to the insertion of this provision, section 80VVA provided for payment of tax on at least thirty per cent. of the income. Studies carried out by the Central Board of Direct Taxes revealed that while the provisions of section 80VVA had the effect of subjecting companies to minimum tax which they would have otherwise not paid, there were still companies which had no income-tax liability despite substantial profits, on account of the fact that companies were availing of depreciation in full under the Income-tax Act. Therefore, despite section 80VVA, the phenomenon of prosperous zero tax companies continued. A study carried out by an economic journal in regard to the performance of 650 top companies during the assessment year 1984-85 showed that out of the top 23 profit-making companies, the profit and loss accounts of 12 companies showed no income-tax liability though they had profits and had declared dividends. About 28 per cent. of the companies (139 companies) accounting for a net profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he value of certain capital assets which is a legitimate deduction in determining the true properties. It is not necessary or relevant to refer to the conditions subject to which the assessee is entitled to depreciation. Section 32(2) which is relevant in the context of the facts of the present case is as follows : "Where, in the assessment of the assessee (or, if the assessee is a registered firm or an unregistered firm assessed as a registered firm, in the assessment of its partners), full effect cannot be given to any allowance under clause (ii) of sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub- section (3) of section 73, the allowance or part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urce under the same head. Section 71 provides that where in respect of any assessment year the net result of the computation under any head of income is a loss and the assessee has no income, the assessee shall, subject to the provisions of the Chapter, be entitled to have the amount of such loss set off against his income, if any, assessable for that assessment year under any other head. Section 72 provides for carry forward and set off of business losses. Sub-section (2) of section 72 which is relevant in the context of the present case, says that "where any allowance or part thereof is, under sub-section (2) of section 32 or sub-section (4) of section 35, to be carried forward, effect shall first be given to the provisions of this section". A reading of sections 70, 71 and 72 of the Act is that one of the important consequences which follows from the principle that income-tax is only one tax and there are not as many taxes as there are heads of income, is that a loss sustained in any year under one head should be set off against income under another head in that year, in order to arrive at the true total income of the assessee. If the net result in respect of any source under a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to the judgment of the Supreme Court in CIT v. Mother India Refrigeration Industries P. Ltd. [1985] 155 ITR 711. The Supreme Court also considered the tax reference of Hindustan Vacuum Glass Ltd. v. CIT in the said judgment. The facts in Mother India Refrigeration's case [1985] 155 ITR 711 (SC), briefly, are that at the end of the assessment year 1950-51, there was an unabsorbed business loss of Rs. 67,534 and unabsorbed depreciation of Rs. 1,78,154. The assessee's income without taking into account the current depreciation was Rs. 50,624 in 1951-52 and Rs. 64,332 in 1952-53. The contention of the assessee was that from out of the income, the unabsorbed loss for the previous year should be set off before deducting the current year's depreciation. He did not succeed before the Income-tax Officer. The matter was carried to the High Court. The High Court agreed with the assessee holding that from the income of the assessment year before deducting current depreciation, business loss of the previous year should be set off. In the tax reference case, the assessment year related to 1969-70. The assessee filed a return declaring a loss of Rs. 50,736. He also filed a revised return claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rge on the capital, while depreciation is taken to be a charge on the profits. It was observed that first proviso, clause (b) under section 205(1) itself starts with a phrase "if the company has incurred any loss in any previous financial year", which means that it refers only to a situation where the net result is a loss after setting off depreciation. In other words, under section 205(1), first proviso, clause (b), loss means, loss after depreciation and not before depreciation. In other words, if the income of a company in the year 1990-91 is rupees nine lakhs, and if in the previous year, i.e., 1989-90, it had incurred a loss of rupees three lakhs and depreciation is declared at rupees four lakhs, the net loss should be arrived at after depreciation. The Special Bench observed that : "In the illustration above, it is the contention Of the Revenue that the fifth situation will not be a case of loss and no deduction should be given. This view is obviously untenable, because the fifth situation is also a case where the company has incurred a loss being the net result of the operations. If we consider otherwise by referring only to the loss before depreciation, then the profit and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... off under section 72 of the Income-tax Act only against the profits and gains of business and not from the income under any other head, whereas the unabsorbed depreciation can be set off against the income under any other head. The above distinction makes all the difference for the purpose of interpreting "loss" as against "depreciation". For instance, in a particular year, carried forward unabsorbed business loss is Rs. 4 lakhs and profit of Rs. 4 lakhs from immovable property and the depreciation is declared at Rs. 2 lakhs. Since the carried forward unabsorbed business loss cannot be set off against the income from the immovable property, it remains as it is, whereas depreciation can be set off against the profits from out of the immovable property ; the resultant figure would still be profit of Rs. 2 lakhs. Therefore, Rs. 2 lakhs will remain as profit. Consequently, clause (iv) under the Explanation to section 115J is not applicable to the situation. The Special Bench had failed to take note of the procedure adopted and the limitations imposed under section 72 of the Act for the purpose of carrying forward unabsorbed loss and carrying forward unabsorbed depreciation while adopti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igures were figures carried over from the previous year for the assessment year 1967-68. The Income-tax Officer was of the opinion that the sum of Rs. 1,59,181 (which represented the amount of unabsorbed depreciation relating to the assessment year 1967-68) and the amount of Rs. 3,49,242 (which represented the unabsorbed loss pertaining to the assessment year 1967-68) could not be carried forward. Therefore, he added back the sum of Rs. 5,08,423 to the returned income for determining the total income for the assessment year 1968-69. The matter went up to the Supreme Court. The question that arose for consideration before the Supreme Court was, whether rejection of the claim of the assessee to carry forward the business loss in the hands of the firm by the Department was justified. On a consideration of the provisions relating to the assessment of registered firms and unregistered firms, rejecting the contention of learned counsel for the assessee that these provisions under sections 182 and 67 of the Act talk only of "loss" and that to take this expression as including "unabsorbed depreciation" as well will obliterate the distinction in the treatment meted out to these as separate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Moreover, unless provision is made for depreciation, the balance-sheet will not present a true and fair view of the state of affairs ; assets should be shown at a figure which represents that part of their value on acquisition, which has not yet expired." Learned counsel also referred to a judgment of the Calcutta High Court in CIT v. Indian jute Mills Association [1982] 134 ITR 68, wherein it was held that "depreciation claimed shall include the expenditure incurred". He also relied upon the judgment of the Supreme Court in [1975] 99 ITR 120 (sic) and submitted that depreciation is an item of expenditure much like any other items of expenditure for the purposes of computing income and "income" includes "loss". Therefore, according to him, even for the purpose of computing "loss", depreciation has to be included. Consequently, loss includes depreciation. He also relied on the judgment of the Supreme Court in Garden Silk Weaving Factory's case [1991] 189 ITR 512. Counsel further submits that under the Companies Act, the gross profits arrived at are subjected to various deductions for the purpose of computation of the net profit, depreciation being one such. Therefore, under the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of depreciation before declaration of dividend. Clause (b) of the proviso to sub-section (1) of section 205 merely provides that the unabsorbed portion of the depreciation provided is to be deducted. There is no surplusage or redundancy in any of the words in clause (b) and they all read together to mean 'unabsorbed depreciation'. 2. Section 1151 is by itself a self-contained section and should be read independently of the provisions of the Income-tax Act. Clause (iv) of the Explanation to sub-section (1A) of section 115J should be given the same meaning as it carries in the parent Act which is the Companies Act from where it was borrowed. 3. Even if the other provisions of the Income-tax Act are made applicable to the said clause (iv) the 'loss' spoken of under the Income-tax Act always includes 'unabsorbed depreciation' and these two are not mutually exclusive of each other. 4. The treatment meted out to unabsorbed depreciation by section 32(2) and sections 72(2) and (3) will not obliterate the general concept that 'loss' includes 'unabsorbed depreciation'. The segregation of loss into the components 'business loss excluding unabsorbed depreciation' and 'unabsorbed depreciati ..... X X X X Extracts X X X X X X X X Extracts X X X X
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