TaxTMI 
TaxTMI 
1993 (2) TMI 146
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....bed depreciation of Rs. 10.63,855 (made up of Rs. 10,10,304 for assessment year 1986-87 and Rs. 53,551 for assessment year 1987-88) and determined the book profits at Rs. 17,03,588 in order to apply the provisions of Section 115J. 30 per cent of this amount came to Rs. 5,11,076 which was determined as the taxable income since it was higher than Rs. 4,26,714 being the income computed under the other provisions of the Act. On a review of this assessment, the Commissioner of Income-tax considered it to be erroneous and prejudicial to the interests of the revenue as, according to him, the unabsorbed depreciation of the earlier assessment years 1986-87 and 1987-88 amounting to Rs. 10,63,855 was not deductible with the result that the book profit would be Rs. 27.67,443 and 30 per cent thereof. namely Rs. 8,30,230 which being higher had to be assessed as the taxable income instead of Rs. 5,11,076 taken by the Assessing Officer. The assessee objected to the revision on the ground that the unabsorbed depreciation had to be deducted under the provisions of section 115J. Explanation (iv). In order to appreciate the controversy, the relevant figures can be tabulated as follows :--- --------....
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....------------------------------- The book profit therefore came to Rs. 2,46,535 and 30 per cent of the same namely Rs. 73,961 was shown as the taxable income. The Assessing Officer was, however, of the view that since the assessee had profit in the earlier two years, the assessee was not entitled to deduction of the net loss. This view was confirmed on appeal. 4. The facts in the case of M/s. Binjusaria Metal Box Co. P. Ltd. (ITA No. 822/Hyd./92) are as follows. The assessee in this case is a public company. For the assessment year 1989-90, corresponding to the previous year ended 31-3-1989, the assessee filed a return declaring total income of Rs. 5,72,770. The profit according to the Profit & Loss account was Rs. 28,93,297 and after deducting electricity charges paid (wrongly debited to Deposit account) and adding provision for taxation and investment allowance reserve, it was Rs. 30,60,710. The assessee deducted the unabsorbed depreciation as detailed below :--- --------------------------------------------------------------------------------------------------------------------------------------------------- Asst. Year Profit / Loss before Depreciation Profit / loss af....
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....he other hand, Shri Mani appearing for the respondants authorised representative of the Department presented the view of the Commissioner of Income-tax with consummate skill, by referring to various canons of interpretation of statutes that once the provisions of section 205(1)(b) of the Companies Act had been incorporated in the Income-tax Act, the meaning and implications with reference to the Companies Act were irrelevant and that section had to be understood only in the context of the provisions of the Income-tax Act. It was submitted that the provisions should be approached with the object of imposing a tax and not with the object of declaration of dividends. It was then submitted that the meaning of the word 'loss' should also be understood in the context of the Income-tax Act and not the Companies Act, and when the word 'loss' had been understood in judicial decisions as meaning loss before depreciation, the same meaning has to be given for the purpose of section 115J. It was argued that since the net resultant loss will always include the depreciation which is deducted for arriving at that figure, the expression "loss or depreciation whichever is less" cannot refer to the w....
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....ion for deducting past losses or unabsorbed depreciation. While moving the Finance Bill, the Prime Minister and the Finance Minister stated as follows :--- "4. In respect of direct taxes. I propose to make the following amendments : (a) Apprehensions have been expressed that the proposed new section 194E of the Income-tax Act, which seeks to extend the area of tax deduction at source may cause unnecessary harassment to large numbers of honest tax-payers who might have to seek refunds. After careful consideration of representations received, this proposal is being withdrawn. (b) The Finance Bill inserts a new section 115J in the Income-tax Act to levy a minimum tax on 'book profits' of certain companies. Representations have been received that in computing book profits for the purpose of determining the minimum tax, losses and unabsorbed depreciation pertaining to earlier years should be allowed to be set off. Otherwise, new projects that have just begun to make profits after some years of losses, and sick companies that have just turned the comer. will become subject to minimum tax. There is merit In this suggestion. Under Section 205 of the Companies Act, 1956, past losse....
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....f the provisions of Chapter III applies ; or (g) the amount withdrawn from the reserve account under section 80HHD, where it has been utilised for any purpose other than those referred to in sub-section (4) of that section, or (h) the amount credited to the reserve account under section 80HHD, to the extent that amount has not been utilised within the period specified in sub-section (4) of that section. (ha) the amount deemed to be the profits under sub-section (3) of section 33AC ; If any amount referred to in clauses (a) to (f) is debited or, as the case may be, the amount referred to in clauses (g) and (h) is not credited to the profit and loss account. and as reduced by, --- (i) the amount withdrawn from reserves (other than the reserves specified in section 80HHD) or provisions, if any such amount is credited to the profit and loss account: Provided that, where this section is applicable to an assessee in any previous year (including the relevant previous year), the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1988, shall not be reduced from the book prof....
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.... certain companies making huge profits and also declaring substantial dividends, have been managing their affairs in such a way as to avoid payment of Income-tax. 36.2 Accordingly, as a measure of equity, section 115J has been introduced by the Finance Act. By virtue of the new provisions, in the case of a company whose total income as computed under the provisions of the Income-tax Act is less than 30 per cent of the book profit computed under the section, the total income chargeable to tax will be 30 per cent of the book profit as computed. For the purposes of section 115J, book profits will be the net profit as shown in the profit and loss account prepared in accordance with the provisions of Schedule VI to the Companies Act. 1956, after certain adjustments. The net profit as above will be increased by income-tax paid or payable or the provision thereof, amount carried to any reserve, provision made for liabilities, other than ascertained liabilities, provision for losses of subsidiary companies. etc., if the amounts are debited to the profit and loss account. Liabilities relating to expenditure which has been incurred or which has accrued in respect of expenses which are oth....
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....ation. 3,00,000 depreciation 80,000 Depreciation 1,00,000 Depreciation 4,00,000 Year 1985 Rs. Rs. Profit before Profit before depreciation 5,00,000 depreciation 5,00,000 Less: Depreciation Less: Depreciation 4,00,000 as per books 2,00,000 ----------------- ------------------- 1,00,000 3,00,000 Less: Deduction Less: Business u/s. 205(2) for loss for 1984 80,000 the year 1984 1,00,000 ----------------- ------------------- 2,00,000 20,000 C.F. Business loss Less: Unabsorbed 1984 3,00,000 depreciation 20,000 ----------------- Nil C.F. unabsorbed depreciation 1985 3,80,000 Year 1986 Rs. Rs. Net loss as per Business loss (-) 10,00,000 books before depreciation (-) 10,00.000 Depreciation 2,00,000 Add: Depreciation as per Income-tax Rules (-) 4.00,000 Business loss to be carried forward (-) 10,00,000 Unabsorbed depreciation to be carried forward (-) 2,00,000 Year 1987 Net profit 10,00,000 Profit before depreciation 10,00,000 Book depreciation 2,00,000 Less: Depreciation as per Income-tax Rules 8,00,000 ----------------- 2,00,000 Less: Carried forward business loss for 1986 to the extent adjusted 2.....