2008 (12) TMI 20 - HC - Income Tax

Depreciation disclosed in notes must be included under s.211(6) and counted for book profit under s.115J

HC held that depreciation not charged to the profit and loss account but disclosed in the notes forms part of the accounts under s.211(6) of the Companies ... Deduction claimed on account of current year depreciation, calculating 'book profit' u/s 115J - Whether the Tribunal was correct in law in allowing depreciation in computation of book profits u/s 115J, even though it was not debited in the P/L account - HELD THAT:- As long as the depreciation which is not charged to profit and loss account but is otherwise disclosed in the notes of the accounts, it would come within the ambit of the expression 'shown' in the profit and loss account, as notes to the account, form part of the profit and loss account by virtue of a sub-section (6) of Section 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. 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. 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. In our view, the ratio of the judgment in Khaitan Chemicals Fertilizers Ltd. [2008 (9) TMI 89 - DELHI HIGH COURT]; 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. According to us, if unabsorbed depreciation can be reduced from 'net profit' to arrive at book profit we see no reason why current year's depreciation even though, not charged, to the profit and loss account though disclosed in the notes appended to the accounts cannot be deducted from the 'net profit' in determining 'book profit' for the purposes of Section 115J of the Act. In our opinion the assessee is entitled to seek deduction of current year depreciation from net profit to arrive at the 'book profit' even though it is not charged to the profit and loss account, though disclosed in the notes appended to the accounts. Thus, we answer the question of law framed by us in favour of the assessee and against the Revenue. In the result, the appeal is dismissed. Issues: Whether, for the purposes of computing 'book profit' under Section 115J of the Income-tax Act, 1961, current year depreciation not debited to the profit and loss account but disclosed in the notes to the accounts can be deducted from the net profit.Analysis: Section 115J(1A) requires profit and loss accounts to be prepared in accordance with Parts II and III of Schedule VI to the Companies Act, 1956. Section 211(6) of the Companies Act treats notes to the profit and loss account as part of the account. Clause 3(iv) of Part II of Schedule VI obliges disclosure, by note, of depreciation not provided and the quantum of arrears computed under Section 205(2) of the Companies Act. The expression 'net profit' in the explanation to Section 115J refers to net profit as shown in the profit and loss account prepared under Section 115J(1A), which includes information in the notes. Prior authority and accounting practice establish that items shown separately in the accounts (including notes) form part of net profit for statutory computations. The statutory scheme permitting adjustment for unabsorbed depreciation and past losses indicates legislative intent to account for depreciation impacts when determining book profit. Therefore, current year depreciation disclosed in notes, though not debited, is part of the accounts and must be taken into account in computing book profit under Section 115J.Conclusion: The deduction of current year depreciation disclosed in the notes to the accounts but not debited to the profit and loss account is allowable in computing 'book profit' under Section 115J; decision is in favour of the assessee.