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TMI Blog2008 (12) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... come Tax Appellate Tribunal was correct in law in allowing depreciation of Rs 16,47,417/- in computation of book profits under Section 115J, even though it was not debited in the profit and loss account, although mentioned in the notes to the account'' 2. Counsel agreed that the filing of paper books be dispensed with and that the appeal be heard straight away. Consequently, on the aforesaid date i.e., 28.11.2008 itself, we heard submissions advanced by the counsel for both parties in respect of the afore-mentioned question of law. 2.1 The aforesaid question of law arises in the background of the following facts:- 2.2 On 31.12.1990, the assessee had filed a return of income tax claiming a loss of Rs 1,04,16,643/-. However, for the accounting year, under consideration, in the profit and loss account, the assessee disclosed an income of Rs 25,51,856/-. The assessee's case was picked up for scrutiny and accordingly, a notice under Section 143(2) of the Act was issued to the assessee. 2.3 In response to the notice under Section 143(2) of the Act, the authorized representative of the assessee, appeared before the Assessing Officer. During the course of the scrutiny, it was discovere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue, has vociferously argued that the adjustments to the profit and loss account of the company can be carried out only in accordance with the provisions set out in the explanation to Section 115J. It was his contention that in view of the definition of 'book profit' as given in the explanation to section 115J, the net profit as shown in the profit and loss account, in the relevant previous year, can only be adjusted i.e., increased or reduced, as the case may be, by reference to heads referred in clauses (a) to (ha) and clauses (i) to (iv) of the explanation to Section 115J. It was thus contended that, as the assessee admittedly, had not charged depreciation to the profit and loss account, no adjustment could be made to the 'book profit'. 3.1 As against this, the learned counsel for the assessee, Mr. Ajay Vohra relied upon the provisions of sub-section (2) of Section 115J of the Act, to demonstrate 'book profit' as defined in the explanation mean 'net profit' as shown in the profit and loss account for the relevant assessment year which is prepared as prescribed under sub-section (1A) of section 115J of the Act. He contended that by virtue of sub-section (1A) of Section 115J of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isen repeatedly is: how are the 'book profits' required to be calculated' For this purpose we are required to note certain provisions from the Income Tax Act, as well as, the Companies Act. 4.3 Section 115J of the Act, in so far as it is relevant for the purpose of the appeal, is extracted hereinbelow:- '(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. Explanation:- For the purposes 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''' 4.4 A perusal of the Section would show that the explanation makes it clear that 'book profit' for the purposes of the said section means net profit as shown in the profit and loss account for the relevant previous year, prepared under sub-section (1A) of Section 115J of the Act. Sub-section (1A) imposes an obligation on every assessee to prepare its profit and loss account for the relevant previous year in accordance of provisions of Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the general instructions for preparation of balance sheet under the heading 'Notes' at the end of that part: Provided that nothing contained in this sub-section shall apply to any insurance or banking company or any company engaged in the generation or supply of electricity or to any other class of company for which a form of balance sheet has been specified in or under the Act governing such class of company. (2) Every profit and loss account of a company shall give a true and fair view of the profit or loss of the company for the financial year and shall, subject as aforesaid, comply with the requirement of part II of Schedule VI, so far as they are applicable thereto. (6)For the purpose of this section, except where the context otherwise requires any reference to a balance sheet or profit and loss account shall include any notes thereon or documents annexed thereto, giving information required by this Act and allowed by this Act to be given in the form of such notes or documents.' 'Part II REQUIREMENTS AS TO PROFIT AND LOSS ACCOUNT 1. xxxxxx 2. xxxxxx 3. The profit and loss account shall set out the various items relating to the income and expenditure of the company ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 211 of the Companies Act, 1956. This is quite evident if the provisions of sub-section (6) of the Section 211 of the Companies Act, are read in conjunction with, sub-section (1A), as well as, the explanation to Section 115J of the Act. 4.11 Another important aspect of the matter is that the expression used by legislature is 'net profit' in contra distinction to the well known accounting term 'cash profit'. The net profit of a company cannot be determined till all items of income and expenses as recognized, as well as, depreciation are taken into account. Depreciation is nothing but loss of value of an asset arising from its use, efflux of time or obsolescence over a period of its useful life. Depreciation, undoubtedly has a major impact in determination of the financial position of a company/enterprise. 4.12 To our minds the use of the expression 'net profit' makes it clear that depreciation not debited to the profit and loss account will have to be taken into while determining 'book profit' under Section 115J of the Act, as long as it forms part of the prescribed accounts. 4.13 This Bench, in the case of CIT Vs. Khaitan Chemicals Fertilizers Ltd; being ITA No 301/2007, in it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oach was to show such items in the statement of profit and loss account after determination of current net profit or loss so as to indicate the effect of such items on the current profit and loss. 4.15 In our view, the ratio of the said judgment would apply notwithstanding the fact that there is no debit to the profit and loss account, in view of our discussion above that net profit cannot be determined without taking into account the information disclosed in the notes appended to the accounts which as observed by us hereinabove, form part of the accounts of the company/assessee. 5. The matter can be looked at from another angle. Under clause (iv) of the Explanation to Section 115J, the net profit as shown in the profit and loss account is to be reduced by, the amount of loss or depreciation which would be required to be set off against profit of the relevant previous year as if the provisions of clause (b) of the first proviso to sub-section (1) of Section 205 of the Companies Act, are applicable. In other words Section 205(1) proviso (b) of the Companies Act read with clause (iv) of the explanation to Section 115J, permits reduction in the 'net profit' to the extent of past los ..... X X X X Extracts X X X X X X X X Extracts X X X X
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