1997 (8) TMI 110 - AT - Income Tax

Tribunal upholds assessee's higher depreciation provision for book profit calculation

Assistant Commissioner Of Income-Tax. Versus SA Plant (P.) Ltd.

Assistant Commissioner Of Income-Tax. Versus SA Plant (P.) Ltd. - ITD 066, 032, Issues Involved:1. Validity of depreciation rates claimed by the assessee.2. Applicability of Schedule XIV of the Companies Act.3. Compliance with Section 115J of the Income-tax Act.4. Acceptance of technical evaluation for higher depreciation.5. Calculation period for depreciation.Issue-wise Detailed Analysis:1. Validity of Depreciation Rates Claimed by the Assessee:The assessee, a private limited company engaged in the manufacture of PVC pipes, claimed depreciation at a higher rate than provided in Schedule XIV of the Companies Act. The Assessing Officer (AO) found this claim unacceptable, stating that the technical evaluation was neither bona fide nor disclosed in the accounts. The AO allowed depreciation only for 10 1/2 months as per Schedule XIV, resulting in a higher profit under section 115J. However, the CIT(Appeals) observed that there is no bar to providing higher depreciation than the minimum prescribed in Schedule XIV, and held that the AO should consider the depreciation as provided by the assessee in the profit and loss account.2. Applicability of Schedule XIV of the Companies Act:The CIT(Appeals) noted that according to Circular No. 2 of 1989 issued by the Company Law Board, companies are required to provide for minimum depreciation as per Schedule XIV, but there is no restriction on providing higher depreciation. The assessee argued that it had provided for depreciation as per the Written Down Value (W.D.V.) method, which is a recognized method under the Companies Act. The tribunal agreed with the CIT(Appeals) that higher rates of depreciation could be justified with proper disclosure, as clarified by the Department of Company Affairs.3. Compliance with Section 115J of the Income-tax Act:Section 115J mandates that if a company's total income is less than 30% of its book profit, the total income shall be deemed to be 30% of the book profit and chargeable to tax. The assessee's total income for the assessment year 1989-90 was negative, necessitating computation under section 115J. The assessee filed a computation showing book profit at Rs. 24,464.44, but the AO recalculated it at Rs. 1,77,169 after adjusting the depreciation. The tribunal upheld the CIT(Appeals)'s view that the AO should not alter the depreciation provided in the profit and loss account for computing book profit under section 115J.4. Acceptance of Technical Evaluation for Higher Depreciation:The assessee provided a technical evaluation certificate from a Chartered Engineer to justify the higher depreciation rates. The AO rejected this on irrelevant grounds, despite the assessee's disclosure in the annual accounts. The tribunal noted that the Department of Company Affairs' clarifications are binding and allow for higher depreciation rates based on bona fide technical evaluations. The tribunal held that the assessee's provision for higher depreciation was proper and supported by the necessary disclosures.5. Calculation Period for Depreciation:The AO questioned the basis for charging depreciation for 21 months. The assessee clarified that it had two previous years: one ending on 30-6-1988 (12 months) and the other ending on 31-3-1989 (9 months), totaling 21 months. The tribunal accepted this explanation, noting that the assessee had to provide for depreciation for the entire period as per Schedule XIV, which came into force from 2-4-1987. The tribunal found no infirmity in the CIT(Appeals)'s direction to consider the depreciation as provided by the assessee for working out the book profit under section 115J.Conclusion:The tribunal dismissed the revenue's appeal, upholding the CIT(Appeals)'s findings that the assessee's provision for higher depreciation was justified and should be considered for computing book profit under section 115J. The tribunal emphasized that the technical evaluation and the disclosure in the annual accounts were proper and in compliance with the relevant provisions of the Companies Act and the Income-tax Act.