2008 (4) TMI 20 - SC - Income Tax

Supreme Court limits Assessing Officer's power on depreciation rates, upholds principles laid in Apollo Tyres case.

The Supreme Court allowed the appeals, setting aside the High Court's judgment. It upheld that the Assessing Officer cannot rework net profits by ... Book profit - minimum corporate tax / minimum alternate tax - deeming provision converting book profits into taxable income - preparation of profit and loss account in accordance with Parts II and III of Schedule VI - Assessing Officer's limited power under section 115J to examine accounts and make adjustments only as provided in the Explanation - depreciation - rates under Income-tax Rules versus Schedule XIV of the Companies Act - legislative incorporation of company law provisions into income-tax computationBook profit - preparation of profit and loss account in accordance with Parts II and III of Schedule VI - Assessing Officer's limited power under section 115J to examine accounts and make adjustments only as provided in the Explanation - depreciation - rates under Income-tax Rules versus Schedule XIV of the Companies Act - Whether the Assessing Officer, for the purposes of section 115J, could rework net profits by substituting depreciation calculated as per Schedule XIV of the Companies Act where the assessee consistently charged depreciation in its profit and loss account at the rates prescribed by the Income-tax Rules and the accounts were certified/maintained in accordance with Schedule VI - HELD THAT: - The Court applied the ratio of Apollo Tyres and examined the object and statutory scheme of section 115J, observing that the provision was enacted to bring within tax net companies showing book profits but little or no taxable income. Section 115J makes the net profit as shown in the profit and loss account prepared in accordance with Parts II and III of Schedule VI the starting point for computing 'book profit' subject only to specified increases and reductions in the Explanation. The Assessing Officer's function is limited to verifying that the accounts have been prepared and certified in accordance with the Companies Act and to making only those adjustments expressly permitted by the Explanation to section 115J. He does not have jurisdiction to go behind the net profit disclosed in the profit and loss account to recompute depreciation by invoking Schedule XIV, where the accounts are otherwise in compliance with Schedule VI and certified.The Assessing Officer could not substitute depreciation computed under Schedule XIV for depreciation actually debited in the profit and loss account (computed under Income-tax Rules) where the accounts were maintained and certified as per Schedule VI; the higher judicial authority's reasoning in Apollo Tyres governs and the revenue's contention was rejected.Final Conclusion: Appeals allowed; the High Court's judgment is set aside and the Assessing Officer's adjustment substituting Schedule XIV depreciation was held impermissible where accounts are prepared and certified in accordance with Schedule VI and only adjustments in the Explanation to section 115J may be made; parties to bear their own costs. Issues Involved:1. Jurisdiction of the Income Tax Officer under section 115J of the Income Tax Act, 1961.2. Calculation of depreciation for the purposes of section 115J.3. Compliance with Schedule VI of the Companies Act, 1956.4. Interpretation of section 115J in light of the Apollo Tyres Ltd. case.Issue-wise Detailed Analysis:1. Jurisdiction of the Income Tax Officer under section 115J of the Income Tax Act, 1961:The primary question was whether the Income Tax Officer could rework net profits by substituting depreciation rates prescribed in Schedule XIV of the Companies Act, 1956, for those consistently used by the company as per the Income-tax Rules. The Court reiterated that under section 115J, the Assessing Officer's role is limited to verifying whether the books of account are certified by the authorities under the Companies Act. Once certified, the Officer can only make adjustments provided in the Explanation to section 115J and cannot go behind the net profit shown in the profit and loss account.2. Calculation of depreciation for the purposes of section 115J:The Court examined whether depreciation should be calculated according to the Income-tax Rules or Schedule XIV of the Companies Act. It was argued that the company's consistent practice of using Income-tax Rules for depreciation should be accepted. The Court noted that Schedule VI of the Companies Act does not mandate any specific depreciation method, allowing companies to use different rates, provided they disclose them. The Court emphasized that the rates in Schedule XIV are minimum rates, and companies can charge higher rates.3. Compliance with Schedule VI of the Companies Act, 1956:The Court highlighted that the company's profit and loss account must comply with Parts II and III of Schedule VI to the Companies Act. The appellant's accounts were audited and confirmed as giving a 'true and fair view,' approved by shareholders, and filed with the Registrar of Companies without objections. The Court observed that there was no dispute that the appellant's profit and loss account complied with the provisions of the Companies Act.4. Interpretation of section 115J in light of the Apollo Tyres Ltd. case:The Court extensively referred to the precedent set in Apollo Tyres Ltd. v. Commissioner of Income Tax, where it was held that the Assessing Officer cannot re-scrutinize the accounts certified under the Companies Act. The Court noted that the purpose of section 115J was to tax companies showing book profits but no taxable income. The income reflected in the company's books, prepared per Parts II and III of Schedule VI to the Companies Act, is deemed income for tax assessment under section 115J. The Court reaffirmed that the Assessing Officer's jurisdiction is limited to verifying the authenticity of the accounts and making specified adjustments, not reworking net profits.Conclusion:The Supreme Court allowed the appeals, setting aside the High Court's judgment. It upheld that the Assessing Officer cannot rework net profits by substituting depreciation rates prescribed in Schedule XIV of the Companies Act for those consistently used by the company as per the Income-tax Rules. The Court reaffirmed the principles laid out in the Apollo Tyres Ltd. case, emphasizing the limited jurisdiction of the Assessing Officer under section 115J. The parties were directed to bear their own costs.