Section 115J book profits fixed by audited accounts; unabsorbed depreciation carryforward allowed against all income heads, including dividends

ITAT Cochin held that for section 115J, "book profit" must be adopted as per the audited profit and loss account prepared in accordance with Parts II and III of Schedule VI to the Companies Act, including arrears of depreciation written off, and the AO has no jurisdiction to recast or substitute such book profit except for the specific adjustments permitted in section 115J. The Tribunal further held that unabsorbed depreciation, being on the same footing as current depreciation, can be carried forward without time limit and set off not only against profits of the same business but also against other business income and income under other heads, including dividend income assessed as "other sources."

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Issues Involved:
1. Computation of 'net profit' for the purpose of section 115J of the Income-tax Act, 1961.
2. Exclusion of dividend income in computing the profits of eligible business under section 32AB.
3. Treatment of loss from buying and selling of units as speculation loss.
4. Set-off of brought forward depreciation against dividend income.

Issue-wise Detailed Analysis:

1. Computation of 'net profit' for the purpose of section 115J:

The primary issue was whether the arrears of depreciation amounting to Rs. 13,66,39,051 should be deducted from the net profit to compute the book profit under section 115J. The learned Dy. Commissioner of Income-tax (Asst.) argued that this deduction was not in accordance with the provisions of Part II and Part III of the Sixth Schedule to the Companies Act, 1956. The CIT(A) agreed, stating that it was not mandatory to provide for the arrears of depreciation if it was not originally provided in the earlier years. However, the Tribunal held that the net profit shown in the profit and loss account, after writing off the arrears of depreciation, was in accordance with the provisions of Parts II and III of the Sixth Schedule to the Companies Act. The Tribunal emphasized that the Department of Company Affairs had confirmed the correctness of the net profit after charging the arrears of depreciation.

2. Exclusion of dividend income in computing the profits of eligible business under section 32AB:

The assessee included dividend income from units of Unit Trust of India in the profits of eligible business under section 32AB. The Dy. Commissioner of Income-tax (Asst.) excluded this income, arguing it was not part of the eligible business profits. The CIT(A) upheld this exclusion. However, the Tribunal held that the income from units of Unit Trust of India should be considered as part of the eligible business profits. The Tribunal reasoned that the assessee's activities of manufacturing tyres and dealing in units constituted the same business, and the income from units was recognized in the profit and loss account prepared in accordance with Part II and Part III of the Sixth Schedule to the Companies Act.

3. Treatment of loss from buying and selling of units as speculation loss:

The CIT(A) treated the loss from the sale of units amounting to Rs. 22,69,700 as speculation loss under the Explanation to section 73 of the Income-tax Act, 1961. The assessee contended that units of Unit Trust of India are not shares, and hence, the Explanation to section 73 was not applicable. The Tribunal agreed with the assessee, stating that units are not shares and the unit holder is not a shareholder. The Tribunal emphasized that the Explanation to section 73 applies only to transactions in shares and not to units of Unit Trust of India.

4. Set-off of brought forward depreciation against dividend income:

The assessee objected to the set-off of brought forward depreciation against dividend income assessed under "other sources." The CIT(A) rejected this objection, following the Supreme Court decision in CIT v. Jaipuria China Clay Mines (P.) Ltd. The Tribunal upheld the CIT(A)'s decision, stating that the provisions relating to depreciation constitute a separate code by itself. The Tribunal emphasized that unabsorbed depreciation can be set off against income under any head, including "other sources," as per the established legal principles.

Conclusion:

The Tribunal concluded that the net profit after charging the arrears of depreciation should be considered for computing book profit under section 115J. The income from units of Unit Trust of India should be included in the eligible business profits under section 32AB. The loss from the sale of units should not be treated as speculation loss, and the set-off of brought forward depreciation against dividend income was justified.

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