1998 (8) TMI 68 - HC - Income Tax

Book profit u/s115J read with s.205(1)(b), UTI units, s.32AB, s.73 loss all favour assessee

HC held that for s.115J, 'loss' in the Explanation excludes depreciation, and book profit must be computed by setting off the lesser of business loss or ... Scope and ambit of section 115J - Manufacture and sale of tyres and tubes - debit of arrear depreciation - computed the book profits for the purpose of section 115J - Whether the Explanation to section 115J will make any difference in the book profit for the purpose of tax computation under section 115J - HELD THAT:- As per subsection (2) of section 115JA, every assessee, being a company, shall, for the purposes of section 115JA, 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. It provides that while preparing profit and loss account, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the profit and loss account laid before the company at its annual general body meeting in accordance with the provisions of section 210 of the Companies Act, 1956. It also provides that where a company has adopted or adopts the financial year under the Companies Act, 1956, which is different from the previous year under the Act, the method and rates for calculation of depreciation shall correspond to the method and rates which have been adopted for calculating the depreciation for such financial year or part of such financial year falling within the relevant previous year. The Explanation to sub-section (2) provides that 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 (2) with the adjustments provided in clauses (a) to (f) and (i) to (vii). Clause (iii) of the Explanation refers to the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account. The Explanation thereto says that for the purposes of this clause, the loss shall not include depreciation. Though the provisions of section 115JA are applicable only for the assessment year 1997-98 onwards, it would appear that the restructuring of the section was necessitated only because of the dispute in regard to the determination of 'book profit' pending before the courts and the Tribunals. According to us, the effect in clause (iii) together with the Explanation thereto in the Explanation to sub-section (2) of the new section 115JA, is to clarify the legislative intention behind clause (iii) of the Explanation to sub-section (1) of section 115J of the Act. This also supports the view taken by us to the effect that the expression 'the loss' used in section 115J means 'excluding depreciation'. We are of the view that the findings rendered by the Tribunal and detailed in paragraph 6 above in so far as they are inconsistent with what we have stated above, cannot be sustained. It is seen that the Commissioner of Income-tax (Appeals) in the appellate order (annexure-B) discussed the question regarding the adjustments to be made in the net profit as provided in clauses (a) to (f) and clauses (i) to (iii) of the Explanation to section 115J of the Act. As discussed in the preceding paragraph, it is necessary to give set off for business loss or depreciation whichever is less, in accordance with section 205(1)(b) of the Companies Act for determining the book profit. This has to be ascertained from the profit and loss account of the company from the very beginning as the company was incorporated only after the introduction of the Companies (Amendment) Act. After ascertaining the business loss and depreciation separately, the Assessing Officer should give deduction on lesser of the two amounts and arrive at the profit for determining the total income chargeable to tax as contemplated in section 115J. Therefore, this part of the order requires to be set aside at this stage. The Assessing Officer will determine the tax accordingly.' This portion of the order has not been challenged by the Revenue before the Tribunal and, therefore, it has become final. This is a matter for the Assessing Officer to consider when he gives effect to the consequential order of the Tribunal, if it has not already been done earlier. Claim made by the assessee under section 32AB of the Act - It has to be noted that while clause (i) of sub-section (2) of section 32AB defines 'eligible business', sub-section (3) of section 32AB provides the mode for computation of profits of eligible business for the purposes of clause (iii) of sub-section (1) of section 32AB. Sub-section (3) of section 32AB is attracted only in a case where the assessee's total income consists of income from eligible business as well as non-eligible business. It is only in such a case separation of profits of eligible business from the total profits of the business as contemplated under clause (b) of sub-section (3) arises. In the instant case, we have already held that the activity of buying and selling of the units of the Unit Trust of India will form part of the eligible business of the assessee and its income by way of dividend and profits arising from the sale of units all will form part of the profits of eligible business. In the instant case, the Tribunal has categorically found that the assessee had maintained only one account for all the funds and that there is one profit and loss account and one balance-sheet both in respect of the manufacture and sale of tyres and in respect of purchase and sale of units of the Unit Trust of India. We have extracted earlier in this judgment the reasoning of the Tribunal for allowing the claim for inclusion of the income from dividends in the profits of eligible business for the purpose of clause (ii) of sub-section (1) of section 32AB. We find that the above reasoning accords with the view taken by us above. We are in full agreement with the reasoning and conclusion of the Tribunal in that regard. Since the Revenue has raised a specific question as to whether the Tribunal was justified in holding that the assessee's business in the purchase and sale of units and its business in the manufacture and sale of tyres constituted one and the same business and since the Tribunal has referred the question for opinion as directed by this court, we will deal with the same also. Whether the said two activities constitute one and the same business is relevant in the context of profits of eligible business and set off of losses or depreciation. As already stated, if the assumption that the activity of purchase and sale of units is 'speculation business' mentioned in Explanation 2 to section 28 and in the Explanation to section 73 goes, the fact that they are separate business falling under the head 'Profits and gains of business or profession' mentioned in section 28 of the Act is of no consequence since the income therefrom has to be computed in accordance with the provisions contained in sections 30 to 43C as specified in section 29 of the Act. Even if the said two activities of the assessee are treated as two separate businesses, once they fall under the definition of 'eligible business', deduction will be available in respect of the profits of both the activities. Likewise, by virtue of the provisions of section 70, the loss from one source can be set off against the loss from another source since they fall under the same head of income. We find that the finding of the Tribunal that the assessee's business in the purchase and sale of units and its business in the manufacture and sale of tyres constituted one and the same business, is perfectly in tune with the tests laid down by the Supreme Court in that regard. Whether the Tribunal was justified in holding that the buying and selling of units is not a s peculation business, that the loss was allowable as a business loss and that it cannot be treated as a speculation business loss. - A perusal of the definition of 'dividend' in section 2(22) would make it clear that only distribution by a company of accumulated profits to its shareholders in any of the forms mentioned in clauses (a) to (e) of the said sub-section will alone be dividend. A unitholder of the Unit Trust of India is not a shareholder, for, the Unit Trust of India Act nowhere treats the unit as a share. Section 32(3), which creates a fiction for treating the income from units as dividends and the trust as a company, does not provide for deeming the unit as a share. In the absence of such a deeming, a unitholder cannot be treated as a shareholder. Consequently, the definition of 'dividend' in section 2(22) of the Act is not attracted, for, as already stated, dividend means any distribution of profits of a company to a shareholder. A share, as observed by the Tribunal, is a bundle of rights and a shareholder is one who can exercise those rights on his own. Some of the rights attached to the shareholding are for the shareholder to participate in the affairs of the company, the right to elect the board of directors and the right to approve the accounts and to vote for the dividend. No such rights are conferred on the unitholder. In order to attract the provisions of the Explanation to section 73 of the Income-tax Act, the assessee must deal in the purchase and sale of shares. Admittedly, the assessee was not dealing in shares and was dealing only in units. Since the units are not treated as shares either under the Companies Act or under the Unit Trust of India Act, the fact that the income received by the unitholder from the trust is deemed to be his income by way of dividends and the trust is deemed to be a company, will not make it a share. In that view of the matter, it has to be held that the provisions of the Explanation to section 73 have no application to the instant case and the Tribunal was perfectly justified in holding that the Explanation to section 73 is not attracted. The application of the said Explanation and to deem the activity of purchase and sale of shares, it is necessary that the shares so dealt with must be the shares of other companies. The expression 'companies' used in that context must mean only companies incorporated under the Indian Companies Act as otherwise there is no question of any 'shares' being issued by the company. The recommendations in the Wanchoo Committee Report and the object with which the Explanation is inserted make the above position clear. There is no question of any manipulation of results from dealing in shares of companies in the instant case since the Unit Trust of India is a trust created under the Unit Trust of India Act where there is no scope for controlling its affairs by any companies or manipulation of its results. Explanation 2 to section 28 of the Act enacts that where speculation transactions carried on by an assessee are of such a nature as to constitute a business, the business (speculation business) shall be deemed to be distinct and separate from any other business. In such case, section 73(1) provides that any loss in respect of the speculation business shall not be set off except against profits and gains, if any, of another speculation business. In other words, this loss cannot be set off against profits and gains from any non-speculative transactions. Since we have already held that the Explanation to section 73 is not applicable to the instant case, the Appellate Tribunal was perfectly justified in allowing the loss as a business loss. Deduction of a sum of being the foreign travel expenses - It is the case of the assessee-company that the wife of the chairman-cum-managing director of the company accompanied him on his business tour and that the accompaniment was for the purpose of enabling him to discharge his social-cum-business obligations in an effective manner. The Special Bench observed that in the modern age, and more so in the western countries, the senior executives are, as a matter of social custom, accompanied by their wives when they visit, though for business purposes, has necessarily some social aspects also. Neither the assessing authority nor the appellate authority has got a case that the foreign tour made by the chairman-cum-managing director is not for any business purposes or that the accompaniment of the wife is not for the purpose of fulfilling the social aspects aforementioned. The authorities -below also do not have a case that the accompaniment of the wife of the chairman-cum-managing director did not result in any advantage to the assessee. It is also relevant to note that the board of directors of the company, by resolution, have permitted the same. Answered the question in the affirmative, in favor of the assessee and against the Revenue. Issues Involved:1. Determination of net profit after providing for arrears of depreciation under section 115J of the Income-tax Act, 1961.2. Eligibility of dividend income from Unit Trust of India for computing profits of eligible business under section 32AB of the Income-tax Act, 1961.3. Treatment of business in purchase and sale of units and its classification as speculation business under section 73 of the Income-tax Act, 1961.4. Allowability of foreign travel expenditure incurred for the wife of the chairman-cum-managing director as a business deduction.Issue-wise Detailed Analysis:1. Determination of Net Profit After Providing for Arrears of Depreciation:Key Points:- The assessee deducted Rs. 13,66,39,051 as arrears of depreciation in the profit and loss account.- The assessing authority disallowed this deduction, stating it was not in accordance with Parts II and III of the Sixth Schedule to the Companies Act, 1956.- The Tribunal held that prior year's depreciation must be deducted to reflect the true financial position.- The Tribunal's findings included that the introduction of Schedule XIV mandated depreciation calculation based on shift working, and arrears of depreciation should be considered as part of current depreciation.Court's Analysis:- The court reviewed the provisions of section 115J and Parts II and III of the Sixth Schedule to the Companies Act.- It concluded that the profit and loss account prepared in accordance with these provisions does not contemplate making a provision for arrears of depreciation a charge against the profits of that year.- The court held that the Tribunal's approach was incorrect and that the net profit should be computed without deducting arrears of depreciation.Judgment:- The court answered the question in the negative, in favor of the Revenue and against the assessee.2. Eligibility of Dividend Income from Unit Trust of India:Key Points:- The Tribunal included Rs. 1,51,89,760 dividend income from Unit Trust of India in the profits of eligible business under section 32AB.- The Revenue contended that dividend income should be assessed under 'Other sources' and not as business income.Court's Analysis:- The court examined section 32AB and the definition of 'eligible business.'- It noted that eligible business includes all business activities except those specifically excluded.- The court held that the business of buying and selling units of the Unit Trust of India is an eligible business and the dividend income forms part of the profits of eligible business.Judgment:- The court answered the question in the affirmative, in favor of the assessee and against the Revenue.3. Treatment of Business in Purchase and Sale of Units:Key Points:- The Commissioner of Income-tax (Appeals) treated the loss from the sale of units as speculation loss under the Explanation to section 73.- The Tribunal held that units are not shares and therefore, the Explanation to section 73 does not apply.Court's Analysis:- The court reviewed the definitions and provisions of the Unit Trust of India Act and section 73 of the Income-tax Act.- It concluded that units are not shares and the Explanation to section 73, which applies to the purchase and sale of shares, does not apply to units.- The Tribunal's decision to treat the loss as a business loss was upheld.Judgment:- The court answered the question in the affirmative, in favor of the assessee and against the Revenue.4. Allowability of Foreign Travel Expenditure:Key Points:- The Tribunal allowed the deduction of foreign travel expenses incurred for the wife of the chairman-cum-managing director.- The Revenue argued that such expenses were not for business purposes.Court's Analysis:- The court considered the factual findings of the Tribunal, which noted that the foreign trip was approved by the board of directors and had a business purpose.- The court distinguished the case from other judgments where such expenses were disallowed due to personal nature.Judgment:- The court answered the question in the affirmative, in favor of the assessee and against the Revenue.Summary of Judgments:I.T.R. No. 70 of 1994:1. Negative, in favor of the Revenue.2. Affirmative, in favor of the assessee.3. Affirmative, in favor of the assessee.I.T.R. No. 43 of 1997:1. Affirmative, in favor of the assessee.2. Affirmative, in favor of the assessee.3. Affirmative, in favor of the assessee.