2008 (12) TMI 20 - HC - Income Tax

Tax Court Allows Deduction for Depreciation in Book Profits Calculation

COMMISSIONER OF INCOME TAX (CENTRAL) -I, NEW DELHI Versus SAIN PROCESSING and WEAVING MILLS (P) LTD.

The court upheld the Tribunal's decision allowing the assessee to deduct current year depreciation not debited to the profit and loss account while ... 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, yes - 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’ u/s 115J Issues Involved:1. Whether the assessee could deduct depreciation not debited to the profit and loss account while computing 'book profits' under Section 115J of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Deduction of Depreciation Not Debited to Profit and Loss Account:The Revenue appealed under Section 260A of the Income Tax Act, 1961, challenging the Tribunal's decision allowing the assessee to deduct current year depreciation of Rs 16,47,417/- not debited to the profit and loss account while computing 'book profits' under Section 115J of the Act.Background Facts:- The assessee filed a return showing a loss of Rs 1,04,16,643/- but disclosed an income of Rs 25,51,856/- in the profit and loss account.- During scrutiny, it was found that depreciation was not charged to the profit and loss account, although disclosed in the notes to the accounts.- The Assessing Officer disallowed the depreciation deduction while calculating 'book profit'.- The CIT(A) and Tribunal had differing views, eventually leading to the Tribunal allowing the deduction, prompting the Revenue's appeal.Contentions:- Revenue's Argument: Adjustments to the profit and loss account must align with the provisions of Section 115J. Since depreciation was not charged to the profit and loss account, it should not be adjusted in 'book profit'.- Assessee's Argument: 'Book profit' should be determined per accounts prepared under Section 115J(1A), incorporating Parts II and III of Schedule VI of the Companies Act. Notes to accounts, including undisclosed depreciation, are part of the accounts per Section 211(6) and should be considered in determining 'book profit'.Court's Analysis:- Purpose of Section 115J: To tax companies declaring profits and dividends but paying zero tax.- Book Profit Calculation: Section 115J(1A) mandates preparing profit and loss accounts per Parts II and III of Schedule VI of the Companies Act. Notes to accounts, including depreciation not charged, form part of the profit and loss account.- Disclosure Requirements: Per Section 211 and clause 3(iv) of Part II of Schedule VI, companies must disclose depreciation not provided for in the accounts. This disclosure is integral to presenting a true and fair view of the company's financial state.- Interpretation of 'Shown': The term 'shown' in the profit and loss account includes notes to accounts, making undisclosed depreciation part of the 'book profit' calculation.- Net Profit vs. Cash Profit: The term 'net profit' encompasses all income and expenses, including depreciation, impacting the financial position of the company.Precedents and Comparisons:- CIT Vs. Khaitan Chemicals Fertilizers Ltd: Prior period expenses/extraordinary items shown separately but part of the net profit were considered in 'book profit' calculation under Section 115JA. The same logic applies to undisclosed depreciation in the current case.Conclusion:- Legislative Intent: Clause (iv) of the Explanation to Section 115J allows reducing 'net profit' by past losses or unabsorbed depreciation. Similarly, current year depreciation disclosed in notes should be deducted from 'net profit' for 'book profit' calculation.- Final Judgment: The Tribunal's decision to allow the deduction of current year depreciation not debited to the profit and loss account is upheld. The appeal is dismissed, favoring the assessee.Result:The court answered the question of law in favor of the assessee and against the Revenue, dismissing the appeal.