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Zero Tax Companies

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Court :
High Court

Brief :
Section 115J of the Income-tax Act, 1961 - Zero tax companies - Assessment year 1990-91 - Whether current year’s depreciation, which had not been charged to profit and loss account but had been disclosed in notes appended to accounts, would be deducted from net profit in determining book profit for purpose of section 115J - Held, yes

Citation :
Commissioner of Income-tax, Central-I, New Delhi vs Sain Processing & Wvg. Mills (P.) Ltd

Facts The assessee had not charged current year’s depreciation to the profit & loss account, though said fact had been disclosed in the notes appended to the account. The Assessing Officer disallowed deduction claimed on account of current year’s depreciation while calculating book profit under section 115J. On appeal, the Commissioner (Appeals) upheld view of the Assessing Officer on the ground that depreciation for current year had not been charged to the profit & loss account. On second appeal, the Tribunal allowed deduction of depreciation in computation of book profits under section 115J. On the revenue’s appeal : Held The Explanation to section 115J(1A) makes it clear that the book profit for the purpose of the said section means net profit as shown in the profit and loss account for the relevant previous year, prepared under sub-section (1A) of section 115J. Sub-section (1A) imposes an obligation on every assessee to prepare its profit and loss account for the relevant previous year in accordance with provisions of Parts II and III of Schedule VI to the Companies Act, 1956. [Para 4.4] Undisputedly the assessee had prepared the profit and loss account in the form prescribed, i.e., Parts II and III of Schedule VI to the Companies Act, but it had not charged depreciation in the profit and loss account and instead had disclosed said fact along with the quantum of current year’s depreciation computed in accordance with section 205(2) of the Companies Act, as per the requirement of clause 3(iv) of Part II of Schedule VI to the Companies Act, by way of a note to the account. [Para 4.5] The requirement of disclosure on failure to provide for depreciation in the profit and loss account as also the quantum of such arrears flows from section 211, read with clause 3(iv), of Part II of Schedule VI to the Companies Act; the reason being that there is an obligation cast on the company to present a true and fair view of its state of affairs to those who rely on its accounts. [Para 4.6] Thus, disclosure in the notes to the account is obligatory by virtue of the provision of sub-section (1A) of section 115J which requires that every assessee shall prepare profit and loss account in accordance with the provision of Parts II and III of Schedule VI to the Companies Act, 1956. [Para 4.7] Sub-section (6) of section 211 of the Companies Act provides that except where the context otherwise requires, any reference to a balance-sheet or profit and loss account shall include the notes thereon or documents annexed thereto, giving information required to be given and/or allowed to be given in the form of notes or documents by the Companies Act. It is obligatory under clause 3(iv) of Part II of Schedule VI to the Companies Act to give information with regard to depreciation, which has not been provided for along with the quantum of arrears. Once this information is disclosed in the notes to the account, it would clearly fall within the ambit of the Explanation to section 115J which defines ‘book profit’ to mean ‘net profit’ as ‘shown’ in the profit and loss account for the relevant assessment year. [Para 4.9] In the instant case, as long as the depreciation was not charged to profit and loss account but was otherwise disclosed in the notes to the account, it would come within the ambit of the expression ‘shown in the profit and loss account’, as notes to the account form part of the profit and loss account by virtue of sub-section (6) of section 211 of the Companies Act, 1956. [Para 4.10] The net profit of a company cannot be determined till all items of income and expenses are recognized as well as depreciation is taken into account. Depreciation is nothing but loss of value of an asset arising from its use, efflux of time or obsolescence over a period of its useful life. Depreciation, undoubtedly, has a major impact on determination of the financial position of a company/enterprise. The use of the expression ‘net profit’ makes it clear that depreciation, which is not debited to the profit and loss account, would have to be taken into account while determining the ‘book profit’ under section 115J as long as it forms part of the prescribed accounts. [Paras 4.11 & 4.12] Under clause (iv) of the Explanation to section 115J, the net profit as shown in the profit and loss account is to be reduced by the amount of loss or depreciation which would be required to be set off against 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 are applicable. In other words, section 205(1), proviso (b) of the Companies Act read with clause (iv) of the Explanation to section 115J, permits reduction in the net profit to the extent of past losses or unabsorbed depreciation, whichever is less. This makes the legislative intent clear. If unabsorbed depreciation can be reduced from the net profit to arrive at book profit, there is no reason to say that current year’s depreciation, even though not charged to the profit and loss account, but disclosed in the notes appended to the accounts, cannot be deducted from the net profit in determining the book profit for the purposes of section 115J. Therefore, the assessee was entitled to seek deduction of current year’s depreciation from net profit to arrive at the book profit, even though it had not been charged to the profit and loss account, though had been disclosed in the notes appended to the account. [Para 5]
 

CA Pawan Goswami
on 16 February 2009
Published in Income Tax
Views : 2244
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