2015 (9) TMI 559 - HC - Income Tax

High Court: Excess Depreciation Provisions Not to Reduce Book Profit

The High Court allowed the appeal in favor of the assessee, overturning the Tribunal's decision. The Court held that excess provisions of depreciation ... Reopening of assessment - escaped income under Section 115JA - assessee had written back depreciation wrongly in their profit and loss account and that therefore the income chargeable to tax had escaped assessment - Tribunal held that books profit is not to be reduced by the excess provisions of depreciation credited in the profit and loss account? - Held that:- The proviso under clause (i) of the Explanation makes it clear that in case where Section 115JA is applicable to an assessee in any previous year, the amount withdrawn from the reserves created or provisions made 'in a previous year relevant to the assessment year commencing on or after the first day of April, 1997', shall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unless the book profit of such year has been increased by those reserves or provisions out of which the said amount was withdrawn under the Explanation. It is not the case of the assessing officer that the provisions made by the assessee in this case were relatable to a previous year relevant to the assessment year commencing on or after the first day of April, 1997. Pointing out the object behind Section 115JA, it was contended by Mr.J.Narayanasamy, learned standing counsel that by a jugglery of the accounting methods, the assessee cannot always make it a 'zero tax' company even while making profits or at least showing profits to certain stakeholders. We appreciate the concern. But the law relating to income tax being what it is, we do not think that the Court is entitled to go in for a purposive interpretation when the plain language of the taxing statute is clear. Explanation (i) is very clear in its purport. The assessee may fall within the ambit of the mischief sought to be undone by Section 115JA. But so long as the express language is in its favour, the mischief or no mischief cannot be cured. - Decided in favour of assessee. Issues Involved:1. Whether the Tribunal was right in law in holding that book profit is not to be reduced by the excess provisions of depreciation credited in the profit and loss account.2. Whether the Tribunal was right in law in holding that excess provision for depreciation provided for in earlier years and credited to the profit and loss account consequent to the change in the method of depreciation would not qualify for adjustment under clause (i) of Explanation to Section 115JA.3. Whether the Tribunal was justified in holding that the appellant must surrender benefits already received.Issue-wise Detailed Analysis:1. Tribunal's Holding on Book Profit Reduction:The primary issue was whether the book profit should be reduced by the excess provisions of depreciation credited in the profit and loss account. The assessee had written back depreciation in their profit and loss account, which led to a notice under Section 148 for escaped income assessment under Section 115JA. The assessing officer determined that the book profit was deliberately inflated by including depreciation written back from earlier years, treating 30% of the book profit as the income under Section 115JA. The Tribunal upheld this view, relying on the Punjab and Haryana High Court's decision in Sterling Steels & Wires Ltd. However, the High Court found that the Tribunal overlooked the factual distinction that the reserves created by the assessee were not relevant to the assessment year commencing on or after April 1, 1997. Thus, the Tribunal's decision was reversed, favoring the assessee.2. Excess Provision for Depreciation and Adjustment Under Section 115JA:The second issue was whether the excess provision for depreciation from earlier years, credited to the profit and loss account due to a change in depreciation method, should qualify for adjustment under clause (i) of Explanation to Section 115JA. The assessee switched from the written down value method to the straight-line method, creating a surplus in depreciation provisions. The assessing officer and Tribunal held that this surplus could not be reduced from the book profit as per the proviso under Explanation (i) of Section 115JA. The High Court noted that the Supreme Court's decision in Indo Rama Synthetics (I) Ltd. provided a method for computing book profit, which involves increasing the net profit by amounts specified in clauses (a) to (g) and reducing it by amounts in clauses (i) to (ix). However, since the provision was made in years not relevant to the assessment year commencing from April 1, 1997, the Tribunal's reliance on Sterling Steels was misplaced. The High Court concluded that the proviso under clause (i) did not apply, thus siding with the assessee.3. Tribunal's Justification on Surrendering Benefits:The Tribunal justified that the appellant must surrender the benefits already received. The High Court, however, emphasized that the plain language of the taxing statute should prevail over a purposive interpretation. The law under Section 115JA and its Explanation (i) clearly indicated that the provisions made in years not relevant to the assessment year commencing from April 1, 1997, should not be reduced from the book profit. Therefore, the Tribunal's decision to make the appellant surrender the benefits was overturned.Conclusion:The High Court allowed the appeal, answering the substantial questions of law in favor of the assessee. The Tribunal's decision was reversed on the grounds that the provisions and reserves created in years not relevant to the assessment year commencing on or after April 1, 1997, should not be adjusted against the book profit. The Court emphasized adhering to the clear language of the taxing statute over a purposive interpretation, thus protecting the assessee's position as per the express provisions of Section 115JA.