CIT vs Ranbaxy Laboratories Ltd.

Revenue in this appeal u/s 260A of the Income Tax Act, 1961 ("Act"), which pertains to the assessment year 1989-90, has raised the following questions of law which arise out of the order passed by the Tribunal dt. 5-11-1999 :

(i) Whether Tribunal was correct in law in upholding the order passed by Commissioner (Appeals) deleting the addition made to the book profit on account of alleged arrear depreciation for the purpose of computing the profit u/s 115J of the Act ?

(ii) Whether Tribunal was correct in deleting the addition of Rs. 2,84,892 being expenditure incurred on rural development programmes treating them as advertisement and publicity expenses ?

(iii) Whether Tribunal was legally correct in allowing debenture issue expenses of Rs. 38,28,900 on issue of convertible debentures ?

Question No. (i)

The respondent is a limited company engaged in business of manufacture and sale of drugs etc. For the assessment year 1989-90, the respondent had filed a return of loss of Rs. 4,26,57,272 under the normal provisions but as the total income was less than 30 per cent of its book profits, taxable income was computed and declared u/s 115J at Rs. 1,07,45,880, which was 30 per cent of the book profits.

The assessing officer noted that the assessee in the book profits had recomputed depreciation in the balance sheet as per Parts II and III of Sch. VI of the Companies Act. With regard to the plant at Okhla it had changed the method of computing depreciation from straight line method to WDV method. As a result the depreciation of Rs. 126.18 lacs which was the balancing figure in view of the change of method was introduced in the books of accounts, reducing the books profits. The assessing officer held that this should not be permitted while computing book profits for the purpose of taxation u/s 115J. This additional depreciation related to past years and thus cannot be allowed. The assessing officer has mentioned that the current years depreciation was Rs. 39.89 lacs to which no addition was made. Thus, it is clear that the depreciation of Rs. 126.18 lacs which was being claimed in this year, had arisen because of difference in the WDV of the asset because of change in method of computing depreciation.

Commissioner (Appeals), rejected the reasoning given by the assessing officer and the addition was deleted. He held that the action of the respondent provided for the earlier errors to make-up the deficiency and this was permissible and not contrary to the provisions of the Companies Act. Further, Parts II and III of the Sch. VI of the Companies Act stipulate and accept that method of computing depreciation could be different from the method described in the Act i.e. the Income Tax Act. The rates prescribed in the Companies Act were the minimum rates. This did not bar an assessee from claiming a higher rate of depreciation. Reference was made to instructions issued by the ICAI, that if there had been understatement of depreciation, the auditor should quantify the same and bring it to the notice of the shareholders as they must know the impact and effect on the net profit.

Tribunal in the impugned order has affirmed the findings recorded by the Commissioner (Appeals). Reference has been made to several judgments of the Tribunal affirming and taking the said view. They relied upon the decision of the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd., Madras Vs. Commissioner of Income Tax, Madras, .

The issue raised before us is covered by the decision of the Supreme Court in Apollo Tyres Ltd. Vs. Commissioner of Income Tax, Kochi, , wherein it has been held as under :

Therefore, we are of the opinion, the assessing officer while computing the income u/s 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The assessing officer thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the assessing officer does not have the jurisdiction to go behind the net profit shown in the Profit and Loss a/c except to the extent provided in the Explanation to section 115J.

The Delhi High Court following the aforesaid decision, in Commissioner of Income Tax Vs. C.J. International Hotels Ltd., has observed that the assessing officer cannot disturb the book profits duly certified to have been drawn from the accounts maintained as per the Companies Act. In an earlier decision Kinetic Motor Co. Ltd. Vs. Deputy Commissioner of Income Tax, , where there was change in method of computing depreciation under the Companies Act 1956, it was observed-:

The short question that arises for consideration in this tax appeal is whether it is open to the assessing officer to make adjustment to the book profits beyond what is authorised by the definition given in Explanation to section 115J of the Income Tax Act, if the accounts are prepared and certified to be in accordance with Parts II and III of Sch. VI to the Companies Act, 1956. In the case of Apollo Tyres Ltd. Vs. Commissioner of Income Tax, Kochi, , the Apex Court held that while computing the income u/s 115J of the Income Tax Act, the assessing officer has only power to examine whether the books of account were certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. It is further held that the assessing officer thereafter has limited powers of making increases and reductions as provided for in the Explanation to the said section. The Apex Court further held that the assessing officer does not have the jurisdiction to go beyond the net profits shown in the Profit and Loss a/c, except to the extent provided in the Explanation to section 115J of the Income Tax Act. In the instant case, the accounts maintained by the assessee are certified by the auditors. Under the circumstances, the book adjustment made by the assessing officer being contrary to the decision of the Apex Court, question No. 1 is answered in the negative arid in favour of the assessee.

During the course of hearing before us, Mr. N.P. Sahni, learned standing counsel appearing for the Revenue, could not challenge the ratio of the aforesaid decisions but submitted that there was a factual dispute whether or not the figure of Rs. 126.18 lacs had arisen for the aforesaid reason. In other words, whether this difference arose due to change in method of calculation of depreciation from straight line method to WDV method ? He submitted that a huge difference could not have arisen for this reason alone and has referred to the assessment order. Learned counsel appearing for the respondent submits that they have no objection, in case, the assessing officer carries out the necessary verification and examines whether additional depreciation of Rs. 126.18 lacs was on account of change in method of calculation of depreciation or had arisen on account of the fact that it pertained to earlier period but has been claimed in this year for some other reason other than the change in method of calculation of depreciation. Statement made by the counsel for the respondent is taken on record. We clarify that in case this difference has arisen on account of change of method of calculation of depreciation, the assessing officer will not touch and go into any other aspect. This answers question No. (i) which has to be answered against the Revenue and in favour of the respondent-assessee, subject to what has been stated by the counsel for the respondent and the direction made above.

Question No. (ii)

With regard to question No. (ii), we are not unable to answer the same, as relevant facts are not on record. The order passed by the assessing officer is cryptic and lacking in details. Commissioner (Appeals) and the Tribunal have relied upon earlier orders to decide the issue in favour of the respondent-assessee. There is no factual assertion or details which enable us to decipher facts as found and apply any principle of law.

During the course of hearing before us, learned counsel for the respondent-assessee has submitted that the Tribunal has referred to order of assessment year 1983-84 but this is factually incorrect. Order of the Commissioner (Appeals) for assessment year 1984-85 has been shown to us. The order records that the respondent under a programme known as Ranbaxy Rural Development Programme had provided medical aid to poor and needy in rural areas. The assessing officer disallowed the same on the ground that this was not expenditure within section 37(1) of the Act. The Commissioner (Appeals) did not agree with the assessing officer and held that by engaging and undertaking the said programme, the respondent had gained publicity, informed public about their products and it was in nature of sales promotion or advertisement. He disallowed 20 per cent of the said expenditure on the ground that it relates to publicity, as per the statute then applicable.

This order stands affirmed by the Tribunal as per the respondent assessee. Thus the expenditure has been subjected to disallowance as contemplated for expenditure relating to sales promotion or advertisement u/s 37(3a) and 37(3c) of the Act. The said observations and findings are equally applicable to the present assessment year.

It has been argued and stated that the respondent had shown social responsibility and incurred expenditure for the benefit of poor and needy, but the Department in the present case has disallowed the expenditure on the ground that it was not relating to business.

If the facts stated by the respondent are correct, the appeal filed on the second question was completely uncalled for. Even the amount involved is minuscule. However in the absence of full facts and failure of the appellant to place relevant orders on record, we cannot answer the question and the same is left unanswered for want of details and proper prosecution.

Question No. (iii)

The third question referred to above is covered by the judgment of the Delhi High Court in Commissioner of Income Tax Vs. Havells India Ltd., . In this decision India, India Cements Ltd. Vs. Commissioner of Income Tax, Madras, and Commissioner of Income Tax Vs. Secure Meters Ltd., have been followed and the question stands answered in favour of the assessee and against the Revenue.

Question No. (iii) is, therefore, answered in favour of the assessee and against Revenue.

The appeal is disposed of. No costs.