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Commissioner Of Income-Tax v. Vandana Rolling Mills Ltd.

Madhya Pradesh High Court

Sep 17, 1997

Judgment

Subsequent
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Court Opinion Summary

Factual and Procedural Background

This is a reference under Section 256(1) of the Income-tax Act, 1961 made by the Tribunal at the instance of the Revenue. The Tribunal referred two questions of law to the High Court concerning whether it was justified in deleting an addition/adjustment of Rs. 5,99,536 made by the Assessing Officer (AO) in computing book profit under Section 115J, and whether the AO's computation was in accordance with Section 115J.

The assessee is a private limited company. It filed a return showing income of Rs. 5,94,820 as per Section 115J; income without applying Section 115J was shown at Rs. 3,80,311. The AO completed assessment under Section 143(3) on March 30, 1990, computing total income without considering Section 115J at Rs. 3,91,128 and total income as per Section 115J at Rs. 7,76,185.

While computing book profits under Section 115J the AO observed that the assessee had claimed depreciation under the Income-tax Rules for the first 12-month period but applied depreciation rates under the Companies Act for the subsequent period. The AO required an explanation why the first-period depreciation was not worked out as per the Companies Act. The assessee replied that, according to Section 115J, no adjustment was to be made under the Companies Act. The AO overruled this explanation and made an adjustment of Rs. 5,99,536 when determining book profits.

The assessee appealed to the Commissioner of Income-tax (Appeals), who affirmed the AO's finding. The assessee then appealed to the Income-tax Appellate Tribunal (Tribunal), which reversed the finding. The Revenue sought a reference to the High Court, and the Tribunal referred the stated questions of law accordingly.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the addition/adjustment of Rs. 5,99,536 made by the Assessing Officer on account of depreciation while computing the income under Section 115J of the Income-tax Act, 1961?
Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the computation made by the Assessing Officer was not in accordance with the provisions of Section 115J of the Income-tax Act, 1961?

Arguments of the Parties

Assessing Officer / Revenue's Position

The AO treated the assessee's computation of depreciation inconsistently: depreciation for the first 12-month period was claimed as per Income-tax Rules, while depreciation for the subsequent period was claimed under Companies Act rates; this prompted the AO to require conformity with the Companies Act for the purpose of Section 115J.
The AO adjusted the book profit by Rs. 5,99,536 to reflect depreciation determined in accordance with the Companies Act as required by Section 115J.
The Commissioner of Income-tax (Appeals) affirmed the AO's adjustment; the Revenue sought judicial clarification after the Tribunal reversed that view.

Assessee's Arguments

The assessee contended that, as per the provisions of Section 115J, no adjustment was required to be made under the Companies Act for the depreciation claimed in the profit and loss account.
The assessee also gave an explanation that Section 115J had not come into force for the relevant period (an argument the court describes as erroneous in its reasoning).

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The court examined the statutory text of Section 115J and its Sub-section (1A). It noted that Section 115J is a special provision for certain companies which deems the total income to be 30% of book profit where total income is less than that threshold. Crucially, Sub-section (1A) requires that, for purposes of Section 115J, the assessee must 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."

The court's central legal analysis proceeded as follows:

Statutory incorporation: Because Sub-section (1A) makes preparation of profit and loss accounts for Section 115J purposes subject to Parts II and III of Schedule VI of the Companies Act, the Companies Act provisions are effectively incorporated for those computations.
Application to facts: The AO observed that the assessee used Income-tax Rules depreciation for the first 12-month period and Companies Act depreciation for the subsequent period. The court found that the assessee did not satisfactorily explain why it mixed the two bases for preparing the profit and loss account required under Section 115J.
Validity of the assessee's temporal argument: The court rejected the assessee's contention that Section 115J had not come into force. It explained that Section 115J was inserted effective April 1, 1988 by the Finance Act, 1987, and that Sub-section (1A) was introduced effective April 1, 1989 by the Finance Act, 1989 — meaning the provisions were applicable at the relevant time.
Tribunal's treatment: The court noted that the Tribunal reversed the AO and CIT(A) without adequately explaining why the mixing of bases was permissible; the Tribunal's order merely referred to a decision of the Income-tax Appellate Tribunal, Bombay, but did not discuss the reasoning of that decision in its own order.
Conclusion from statutory duty: Given the mandatory language of Sub-section (1A), the court concluded the assessee ought to have prepared its profit and loss account in conformity with Parts II and III of Schedule VI to the Companies Act for the relevant period and that partial compliance (i.e., applying Income-tax Act provisions for part of the period) was incorrect.

The court limited its analysis to the discrete issue of whether the Companies Act method should have been applied for the computation of book profits under Section 115J and did not engage in wider factual computations beyond that statutory point.

Holding and Implications

HOLDING: The court answered the referred questions of law in favour of the Revenue and against the assessee.

Implications and direct effect:

The Tribunal's reversal of the AO/CIT(A) on the specific point of depreciation and the computation of book profit under Section 115J was held to be unjustified by the High Court.
By answering in favour of the Revenue, the court confirms that the profit and loss account for the purposes of Section 115J must be prepared in accordance with Parts II and III of Schedule VI to the Companies Act, and that the AO's adjustment (which arose from non-conformity) was justified on that statutory basis.
No broader precedential developments were articulated by the court in this opinion; the decision addresses the direct dispute between the parties on the correct statutory basis for computing book profit under Section 115J and reverses the Tribunal's contrary outcome in that respect.

Show all summary ...

1. This is a reference under Section 256(1) of the Income-tax Act, 1961, at the instance of the Revenue and the following questions of law have been referred by the Tribunal for answer by this court :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the addition/adjustment of Rs. 5,99,536 made by the Assessing Officer on account of depreciation while computing the income under Section 115J of the Income-tax Act, 1961 ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the computation made by the Assessing Officer was not in accordance with the provisions of Section 115J of the Income-tax Act, 1961 ?"

2. The assessee is a private limited company and had filed its return of income showing an income of Rs. 5,94,820 as per the provisions of Section 115J of the Income-tax Act, 1961 (for short "the Act"). The income without considering the provisions of Section 115J of the Act was shown at Rs. 3,80,311. The Assessing Officer completed the assessment under Section 143(3) of the Act on March 30, 1990. The total income without considering the provisions of Section 115J was computed at Rs. 3,91,128 whereas the total income computed as per the provisions of Section 115J was determined at Rs. 7,76,185. While computing the book profit under Section 115J of the Act, the Assessing Officer noticed that the assessee claimed depreciation as per the Income-tax Rules, for the first period of 12 months and, for the second period, the said depreciation was claimed as per the rates prescribed under the Companies Act. The assessee-company was asked to explain why the depreciation for the first period be not worked out as per the provisions of the companies act. The assessee explained that as per the provisions of Section 115J of the Act, no adjustment was to be made under the Companies Act. This was overruled by the Assessing Officer. This resulted in an adjustment of Rs. 5,99,536 while determining the book profits under Section 115J of the Act. Aggrieved by this order, the assessee approached the Commissioner of Income-tax (Appeals) and the Commissioner of Income-tax (Appeals) affirmed the finding of the Assessing Officer. Thereafter the assessee approached the Tribunal and the Tribunal reversed the finding. Hence, the Revenue approached the Tribunal for referring the aforesaid questions of law to this court and, accordingly, the Tribunal has made this reference.

3. We have gone through all the three orders and heard learned counsel for the parties. Section 115J reads as under :

"115J. Special provisions relating to certain companies.--(1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee 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 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-

(a) the amount of income-tax paid or payable, and the provision therefor ; or

(b) the amounts carried to any reserves (other than the reserves specified in section 80hhd or sub-section (1) of section 33ac), by whatever name called ; or

(d) the amount by way of provision for losses of subsidiary companies ; or

(e) the amount or amounts of dividends paid or proposed ; or

(f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies ; or

(g) the amount withdrawn from the reserve account under Section 80HHD, where it has been utilised for any purpose other than those referred to in sub-section (4) of that section ; or

(h) the amount credited to the reserve account under Section 80HHD, to the extent that amount has not been utilised within the period specified in sub-section (4) of that section ; or (ha) the amount deemed to be the profits under sub-section (3) of section 33ac ;

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 credited to the profit and loss account, and as reduced by,--

(i) the amount withdrawn from reserves (other than the reserves specified in Section 80HHD) or provisions, if any such amount is credited to the profit and loss account :

Provided that, where this section is applicable to an assessee in any previous year (including the relevant previous year), the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1988, shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation ; or

(ii) the amount of income to which any of the provisions of Chapter III applies, if any such amount is credited to the profit and loss account ; or

(iii) the amounts, [as arrived at after increasing the net profit by the amounts referred to in Clauses (a) to (f) and reducing the net profit by the amounts referred to in Clauses (i) and (ii)] attributable to the business, the profits from which are eligible for deduction under Section 80HHC or Section 80HHD ; so, however, that such amounts are computed in the manner specified in Sub-section (3) or Sub-section (3A) of Section 80HHC or Sub-section (3) of Section 80HHD, as the case may be ; or

(iv) 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 Clause (b) of the first proviso to Sub-section (1) of Section 205 of the Companies Act, 1956 (1 of 1956), are applicable.

(2) Nothing contained in Sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of Subsection (2) of Section 32 or Sub-section (3) of Section 32A or Clause (ii) of Sub-section (1) of Section 72 or Section 73 or Section 74 or Sub-section (3) of Section 74A or Sub-section (3) of Section 80J."

4. This is a special provision relating to certain companies and this provides that if the total income in respect of any previous year relevant to the assessment year commencing on or after April 1, 1988, 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. Sub-section (1A) of Section 115J of the Act provides that the assessee 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. Then it is provided in the Explanation to this Sub-section how the profit is to be worked out.

5. The question before us is limited to whether the assessee in the present case is entitled to the benefit of adjustment of profit and loss account in terms of the Companies Act or not. Section 115J of the Act clearly lays down that for purposes of working out profit and loss for the relevant previous year, it shall be worked out in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act. Therefore, by virtue of these provisions, the provisions of the companies act would be applied and the balance-sheet has to be worked out by the assessee in terms of the Companies Act, The Tribunal has not pointed out why the assessee did not give satisfactory explanation that for the first twelve months, how it worked out profit and loss account in terms of the Income-tax Act and for the next part in accordance with the Companies Act. The explanation given by the assessee that the provisions of Section 115J of the Act had not come into force is apparently erroneous. Section 115J was inserted with effect from April 1, 1988, by the Finance Act, 1987, and Sub-section (1A) was introduced with effect from April 1, 1989, by the Finance Act, 1989. Therefore, at the relevant time, this provision was applicable in the case of the assessee and it should have worked out the profit and loss account in terms of Parts II and III of Schedule VI to the Companies Act. The assessee has done it in part but for the earlier part applied the provisions of the Act of 1961 which is not correct. In this view of the matter, we are of the opinion that the view taken by the Tribunal does not appear to be justified. The Tribunal has not given any reason except that it has made a reference to the decision of the Income-tax Appellate Tribunal, Bombay. What was the reason given by the Bombay Tribunal has not been discussed in the order of the Tribunal. However, as we pointed out earlier that the provisions of the companies act stand incorporated by virtue of sub-section (1a) to section 115j, the assessee should have prepared the balance-sheet of profit and loss in terms of the Companies Act. Hence, the view taken by the Tribunal is not correct.

6. Accordingly, we answer these questions of law in favour of the Revenue and against the assessee.