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 Act and must be taken into account in computing book profit under s.115J. The court ruled that net profit cannot be determined without including such disclosed depreciation, applying the ratio in Khaitan Chemicals, and therefore allowed deduction of current-year depreciation even if not debited to the P&L. The court answered the legal question in favour of the assessee and against the Revenue and dismissed the appeal.

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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.

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