1993-VIL-178-ITAT-BLR

Equivalent Citation: ITD 046, 280, TTJ 048, 577,

Income Tax Appellate Tribunal BANGALORE

Date: 27.05.1993

SIPANI AUTOMOBILES LIMITED.

Vs

DEPUTY COMMISSIONER OF INCOME-TAX.

BENCH

Member(s)  : S. ANANDA REDDY., S. BANDYOPADHYAY.

JUDGMENT

Per Bandyopadhyay, Accountant Member ------ This appeal filed by the assessee is directed against the order of the Commissioner of Income-tax (Appeals), dated 27-2-1992 in which he upheld the action of the Deputy Commissioner of Income-tax, Special Range, in rejecting the rectification petition filed by the assessee under section 154. The facts of the case are as follows : The assessee company filed its return of income for the assessment year 1990-91 on 31-12-1990 in which, inter alia, the adjusted book profit of the assessee computed under section 115J was shown at the negative figure of (-) Rs. 3,38,845. In computing the same figure, the assessee had started as per the figure of net profit shown at the end of the profit and loss account, ie. profit and loss appropriation account, at Rs. 5,13,210. The Assessing Officer, however, took into consideration the figure of net profit as shown in the actual profit and loss account, ie. above the line, at Rs. 1,90,94,437. He repeated the other adjustments as done in the return and arrived at the figure of adjusted book profit at Rs. 1,82,42,382. 30 per cent of this amount being Rs. 54,72,710 was subjected to tax under section 115J in the intimation under section 143(1)(a) prepared by the Assessing Officer on 18-6-1991. Additional tax of Rs. 5,47,271 was also charged under section 143(1A), in the said intimation.

The assessee filed a rectification petition under section 154 of the Income-tax Act on 27-6-1991, in which it was claimed that the figure of book profit should have been considered at Rs. 5,13,210, as taken in the return, and not as Rs. 1,90,94,437, as adopted in the intimation under section 143(1)(a). The Assessing Officer, after making certain discussions about the facts of the case, rejected the said petition of the assessee and refused to carry on the rectification as asked for, in his order under section 154 dated 8-10-1991. The assessee preferred appeal against the said order of the Assessing Officer, which was dismissed by the Commissioner (Appeals) by his order dated 27-2-1992 after detailing out the facts of the case and also the legal issue involved. The assessee has hence come up before us in appeal against the above-mentioned appellate order passed by the Commissioner (Appeals).

2. The representative of the assessee has drawn our attention to the printed profit and loss account of the assessee company prepared for the year ended 31-3-1990 and has come up with the contention that although the net profit arising out of the consideration of the actual items of income and expenditures has been arrived at in the said printed profit and loss account at Rs. 1,90,94,437, finally, however the actual amount of net profit comes out of the profit and loss account in its entirety at the figure of Rs. 5,13,210 only. It has been contended that this figure actually represents the difference between the amounts of loss brought forward from the previous balance sheet and that carried to the balance sheet for this year and should be considered as the net profit of the assessee company for the year under consideration. It is contended that for the purpose of applicability of the provisions of section 115J, this figure of ultimate net profit should be considered as the book profit of the company. In support of this contention, the representative of the assessee has referred to the decision of the Bombay High Court as reported in Khatau Junkar Ltd. v. K.S. Pathania [1992] 196 ITR 55. The representative of the assessee has also tried to strengthen his arguments by referring to the Explanation to section 115J in which provisions have been made for addition and deduction of certain amounts like the amount or amounts of dividends paid or proposed, etc. The said representative argues that since dividend paid or proposed is always incorporated in the profit and loss appropriation account and not in the profit and loss account, it cannot be said that the book profit means the figure of net profit as per the profit and loss account alone, otherwise, in such a case, there would not have been any necessity for making any reference to the amount or amounts of dividends paid or proposed required to be added up. The representative of the assessee, therefore, concludes that the book profit should mean the figure of net profit as per the profit and loss appropriation account finding place at the bottom of the entire profit and loss account sheet.

3. The departmental representative, on the other hand, refers to the provisions of sub-section (1A) of section 115J which states that the profit and loss account for the relevant previous year is only required to be taken into consideration. He argues that since the entries in the profit and loss appropriation account generally relate to adjustments in respect of earlier years, it is the figure of net profit as per the main profit and loss account only, ie. above the line, which is alone to be considered as book profit.

4. The expression "book profit" has not been defined or even tried to be illustrated anywhere in the Income-tax Act and not so even in section 115J of the said Act, wherein a specific mention has been made of this particular expression. On the other hand, sub-section (1A) of section 115J states as below :

" Every assessee, being a company, shall, for the purpose of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956). "

It may thus be found that although the book profit has not exactly been defined in the Income-tax Act, it is, however, supposed to be the profit as shown in the profit and loss account of the company for the relevant previous year and as prepared in accordance with the different provisions of the Companies Act. The expression "profit and loss account" has also not been defined anywhere. A normal profit and loss account starts with the trading account, incorporates the actual profit and loss account and generally ends with the profit and loss appropriation account. All these three accounts, in accountancy parlour, are said to constitute the actual profit and loss account in its entirety. We may, therefore, be prompted to come to the conclusion that the figure of net profit/loss as shown at the bottom of the combined profit and loss account (including the profit and loss appropriation account) should mean the book profit as referred to in section 115J. This decision gets strengthened by the different items of explanation requiring addition or subtraction of items like amount or amounts of dividends paid or proposed (which are usually shown in the profit and loss appropriation account only and not in the profit and loss account itself). Had the intention of the Legislature been to restrict the book profit to the figure as per the profit and loss account only, i.e., above the line, there would have been no necessity to provide for adjustments of this type in the Explanation under consideration.

At the same time, again, it will also not be proper to say that whatever figure arrives as the net profit as per the profit and loss appropriation account, should be considered to represent the book profit. This is more so in view of the clear-cut provisions made in sub-section (1A) of section 115J which states that the profit and loss account should be for the relevant previous year only. In many cases, profit and loss appropriation account incorporates certain entries which cannot strictly be considered to be connected with the relevant previous year for income-tax purposes. In this connection, we would like to refer to the decision of the ITAT, Calcutta Bench 'D' Special Bench in the case of Sutlej Cotton Mills Ltd. v. Asstt. CIT [1993] 45 ITD 22. It has been held by the said Special Bench of the ITAT (at page 25 of the aforesaid ITD) as below:

" When section 115J was brought in, the object was to introduce the provision thereby every company will have to pay a minimum corporate tax on the profits declared by it in its own accounts. These profits can only be those which, are assessable as income under the Act. It is now well settled that in the interpretation of statutes one has to adopt such a construction as will promote the general legislative purpose underlying the provision. In the present case as could be seen from the Finance Minister's speech and the Memorandum explaining the provisions, the intention was to make the company pay tax on income which would otherwise be reduced by reason of certain deductions available under the Act. As regards the question whether the Assessing Officer can recast the book profits, an implied mandate is given to the Assessing Officer to verify and satisfy himself whether the net profit was as shown in the profit and loss account for the relevant previous year and as to whether the profit and loss account was prepared in accordance with Part II and Part III of the Sixth Schedule to the Companies Act. If in case thc Assessing Officer finds that the net profit was not as shown by the profit and loss account or the profit and loss account was not prepared in accordance with Part 11 and Part III of the Sixth Schedule to the Companies Act. he is entitled to adjust the profit. To this extent, the power to adjust the book profit will have to be conceded to the Assessing Officer. "

5. It may be seen from above that the Special Bench of the ITAT has already held that the expression "book profit" need not mean the net profit as shown in the profit and loss account. On the other hand, the book profit should take into consideration such profits which are assessable as income under the Income-tax Act. Thus, we are guided by the proposition as laid down by the Special Bench of the ITAT that while computing the book profit, we need not stick to the figures of net profit as per either the profit and loss account or even the profit and loss appropriation account. On the other hand, it may be possible to recast the figures shown in the profit and loss account so as to arrive at the actual book profit relating to the business profits of the assessee for the relevant year. We are, therefore, finally of the view that although in most cases, book profit would mean the net profit as per the profit and loss account, there may be certain cases where the expression may mean the net profit as per the profit and loss appropriation account or even a completely different figure from either of these two figures of net profits, as will be the matter in the instant case as is going to be shown by us below.

6. In this particular case, the difference between the figures of net profit as per the profit and loss account and as per the profit and loss appropriation account is arising on account of two adjustments made in the appropriation account and as shown below:

Net profit for the period (as per profit and loss account) Rs. 1,90,94,437

Less :

(i) Prior period adjustments Rs. 80,37,301

(ii) Depreciation for earlier years Rs. 1,05,43,926 Rs. 1,85,81,227

----------------------------- -----------------------------

Net profit as per the profit and loss appropriation account Rs. 5,13,210

7. The first item of adjustment relates to adjustments for the earlier years. It is a well-known fact that in many cases, adjustments for earlier years are allowed to be taken into consideration while arriving at the net total income of an assessee to be computed for income-tax purposes. Whereas under the Companies Act, all items of expenses relating to earlier years are shown as adjustments for prior years and are usually taken care of in the profit and loss appropriation account by making debit or credit entries according to the circumstances of the case, for income-tax purposes, however, many of these items will have to be allowed as expenses or added back as income by way of liabilities/income, although relating to earlier years, actually, however, accruing during the previous year under consideration. It is, therefore, not at all uncommon to compute taxable income of an assessee by taking into consideration fully or partially the figures of adjustments relating to earlier years shown in the profit and loss appropriation account. It would also be unfair to conclude that since these items have been shown below the line and taken into consideration in the profit and loss appropriation account only, they should not be considered for the purpose of arriving at the book profit for the year. In the instant case, the departmental representative raised a point that in the impugned order under section 154, the assessing officer clearly discussed that the liabilities in respect of the expenses being interest pertaining to earlier years to the extent of Rs. 80,30,301 did not exactly arise during the accounting year under consideration, but did so in the next April only. This particular issue is a disputed one and in the regular assessment to be made under section 143(3) it may be tried to inquire into whether the liability under consideration did actually accrue during the accounting year under consideration. In the instant case, however, where the assessing officer is required to take into consideration the income of the assessee in a summary manner as per the return while preparing his intimation under section 143(1)(a), there is no right on his part to challenge the statement made by the assessee in the return that this amount has got to be deducted as liability relating to the year for computing the net profit of the assessee, inasmuch as this item cannot be considered to be a case of prima facie disallowance. Hence, we are of the view that so far as the computation of book profit under section 115J for the purpose of intimation under section 143(1)(a) is concerned, the amount of Rs. 80,37,301 being prior period adjustment is required to be deducted from the net profit of the assessee as per the profit and loss account, for arriving at its book profit.

8. However, the same cannot be said about the claim for deduction of the amount of Rs. 1,05,43,926 being depreciation for earlier years. For arriving at the profit of any company for a particular year, depreciation relating to its assets for that particular year only is required to be deducted. No stretch of the accounting principles will allow anybody to compute the net profit of a company for a particular year by deducting even the depreciation clearly stated to be relating to earlier years. Therefore, although a provision for making adjustment of depreciation relating to earlier years may be there under the Companies Act, for the purpose of computing even the book profit of the company required to mean its actual business profit for the year, as has been laid down by the above-mentioned decision of the Special Bench of the ITAT, it will not be possible to allow deduction in respect of the depreciation for the earlier years. Finally. therefore, we come to the conclusion that the book profit in this particular case means neither the figure of Rs. 1,90,94,437, being the net profit as per the profit and loss account, nor Rs. 5,13,210, being the net profit as per the profit and loss appropriation account, but the figure being computed by us as below :

Net profit as per the profit & loss account Rs. 1,90,94,437

Less: Prior period adjustments Rs. 80,37,301

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Actual book profit for the year Rs. 1,10,57,136

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9. However, at the same time, we note that there is a special provision in section 115J for allowing the depreciation in respect of earlier years. This is provided in clause (iv) to the proviso to the Explanation to the section. In accordance with this clause, the amount of the loss or the amount of depreciation which would be required to be set off against the profit of the relevant previous year as if the provisions of clause (b) of the first proviso to sub-section (1) of section 205 of the Companies Act, 1956, are applicable, will have to be deducted from the figure of book profit by way of one of the adjustments. Section 205 of the Companies Act states that no dividend shall be declared or paid by a company for any financial year except out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2) or out of the profits for any previous financial year or years arrived at after providing for depreciation in accordance with those provisions, etc. Clause (b) of the first proviso to this section again states that if the company has incurred any loss in any previous financial year or years, then, the amount of loss or an amount which is equal to the amount provided for depreciation for that year or those years, whichever is less, shall be set off against the profits of the company for the year for which dividend is proposed to be declared or paid or against the profits of the company for any previous financial year or years, arrived at in both cases after providing for depreciation in accordance with the provisions of sub-section (2) or against both. It is clear from above that the adjustment as required in clause (iv) to the proviso to the Explanation requires that if any loss has been incurred by the assessee in any earlier year, then the amount of the loss or the amount provided for depreciation for that year or those years will be required to be set off against the profits of the company for the year under consideration. It does not state that depreciation will have to be provided for in each year's count. On the other hand, if depreciation be provided for the earlier years for which the company had incurred loss, in the accounts of the company till the date of computation of the income of the company for the year under consideration, such depreciation for the earlier years would also account for the purpose of this type of adjustment. In the instant case, the records show that in its computation of book profit for the purpose of section 115J accompanying the return of income for the year under consideration, the company had claimed for deduction of an amount of Rs. 43,83,864 being the amount of loss or the amount of depreciation relating to earlier years required to be deducted in accordance with the provisions of clause (iv) to the proviso to the Explanation to section 115J. The said amount of Rs. 43,83,864 is again found to have been actually allowed by the Assessing Officer in his computation of the income of the assessee under section 115J. The assessee has come up with the claim for another amount of Rs. 1,05,43,926 in its accounts for this particular year, although this amount is stated to be relating to depreciation for the earlier years. We are not in possession of the full facts and figures of the case and, therefore, we are not in a position to say to which year and in which way this amount represents the depreciation for the earlier years. It may be that for certain earlier years, depreciation was not actually provided in the accounts of the assessee company or that depreciation was provided in a less manner than as is required to be provided under the Income-tax Act. In any case, the allowance of the claim for loss or depreciation to the extent of Rs. 43,83,864 clearly shows that unabsorbed depreciation to the minimum extent of this amount has actually been carried forward in the books of the assessee from the earlier years. If the facts of the case be that, this new amount of Rs. 1,05,43,926 truly represents further amounts of unabsorbed depreciation for those earlier years and if the conditions relating to loss or depreciation for the earlier years to be taken into consideration in this year covers this amount of Rs. 1,05,43,926 also, then there is no doubt that this extra amount will also have to be allowed by way of adjustment under clause (iv) of the proviso to the Explanation to section 115J. As, however, we are not seized of the relevant materials and the facts and figures, we restore to the Assessing Officer this particular matter relating to further allowance, if any, of any amount over and above the amount of Rs. 43,83,864 in accordance with clause (iv) of the proviso to the Explanation to section 115J for a factual examination of the issue and treatment thereof in accordance with our discussions and directions as above. We furthermore direct the Assessing Officer to take into consideration the decision of the ITAT, Hyderabad Bench (Special Bench) in the case of Surana Steels (P.) Ltd. v. Dy. CIT [1993] 45 ITD 1. while computing the said further adjustments, if any.

10. The other issue raised by the assessee relates to levy of additional tax under section 143(1A). The assessee denies its liability to additional tax inasmuch as the variation made by the Assessing Officer is stated to be not due to any prima facie adjustment. We are, however, of the view that the assessee wrongly stated its book profit to be the net profit as per profit and loss appropriation account after deducting depreciation relating to earlier years and to that extent adjustment made by the Assessing Officer by adding back that amount to the figure shown by assessee can be considered to be an adjustment relating to a prima facie error and hence levy of additional tax should follow on account of that adjustment. Hence, the levy of additional tax on the adjustments, if any, sustained after carrying out our directions as given above, is being confirmed in principle, although, at the same time, the assessee would be entitled to consequential relief in the amount of additional tax as a result of the reductions to be made out of the net total income ultimately computed on the basis of this particular order.

11. In the result, the appeal is partially allowed to the above-mentioned extent

 

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