The Commissioner of Income Tax vs Nicco Uco Alliance Credit Ltd.

P.D. Dinakaran, J.—The above tax case appeal is directed against the order of the Income Tax Appellate Tribunal in ITA No. 1702/Mds/1991 dated 21.03.2001, raising the following substantial questions of law.

Whether in the facts and circumstances of the case, the Tribunal is right in holding that, while computing the book profit u/s 115J, the net profit shown in the profit and loss account is not to be increased by all the items in the Clause (a) to (ha) of the explanation to 115J (1A).

Whether in the facts and circumstances of the case, the Tribunal is right in holding that the unabsorbed depreciation to be carried forward should be enhanced by an amount equal to the income assessed to tax u/s 115J?

2.1. The revenue is the appellant. The assessment year involved in this appeal is 1988-89. The assessee is a leasing company. The assessee filed its return of income for the assessment year 1988-89 on 29.07.1988 declaring an income of Rs. 19,40,250/-. Even though the business loss of Rs. 77,65,191/- has been worked out for income tax purpose, the short question that arises for our consideration is whether the Tribunal has erred in holding that the unabsorbed depreciation allowance to be carried for set off against the income of the subsequent years should be enhanced by an amount equal to the income assessed to tax u/s 115J, when the assessee had been assessed to tax u/s 151J, because the claim of the assessee was not allowable in view of Sub-section (2) of 115J of the Income Tax Act, which provides that nothing contained in Sub-section (1) of Section 115J, will affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent years.

2.2. The Assessing Officer in its order dated 28.02.1991 u/s 143(3) of the I.T. Act, determined the unabsorbed depreciation to be carried forward at Rs. 1,04,50,039/- after adjusting the income of Rs. 77,34,501/- against the depreciation allowable as per rules. The assessee''s claim is that as there was the sum of Rs. 19,40,250/- assessed separately u/s 115J, it would not be correct to adjust the depreciation allowance against the entire income of Rs. 77,34,501/- and that the unabsorbed depreciation to be carried forward should be enhanced by an equal amount.

2.3. The contention is that though in the order u/s 143(3) the income was determined at Rs. 77,34,501/-, the entire amount was not allowable to adjust against the allowance of depreciation because a sum of Rs. 19,40,250/- was brought to tax u/s 115J, which would mean that the unabsorbed depreciation to be carried forward was Rs. 19,40,250/- more than that allowed by the Assessing Officer.

2.4. On appeal at the instance of the assessee, the Commissioner of Income Tax (Appeals) allowed the appeal by his order dated 17.6.1991, holding that a plain reading of the Act makes it clear that it was not the intention of the legislature to restrict the addition to one of the items in Section 115J enumerated at (a) to (f); the explanation clearly mentions that the book profit is to be increased by these amounts if any such amount is debited to the profit and loss account; the wording is not "any one such amount" or "lease of any such amounts"; the explanation does not qualify the words "as increased by"; the existence of the word "either" along with the word "or" would not be appropriate; Section 114J is a deeming provision and need to be strictly construed without importing any other words or meaning than that which was conveyed by the section; and the Assessing Officer had correctly interpreted the section and there was no need to interfere with his finding, confirming the order of the Assessing Officer.

2.5. On further appeal before the Income Tax Appellate Tribunal, the assessee, placing reliance on the decision of the Gauhati High Court in the case of Lallacherra Tea Co. (P.) Ltd. Vs. Commissioner of Income Tax, , contended that the unabsorbed depreciation to be carried forward should be enhanced by an amount equal to the income assessed to tax u/s 115J. But, the revenue contended that the claim of the assessee was not allowable in view of Sub-section (2) of Section 115J which provides that nothing contained in Sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year and referred to the decision of the Andhra Pradesh High Court in the case of Suryalatha Spinning Mills Ltd. and Another and Suryavanshi Finance and Investments and Others Vs. Union of India and Another, , wherein it was held that the amount of income arrived at for the purpose of assessment u/s 115J could not be taken note of while considering, the question of carrying forward the adjusted loss. However, the Appellate Tribunal, following the decision of the Gauhati High Court in the case of Lallacherra Tea Co. (P.) Ltd. Vs. Commissioner of Income Tax, , directed the Assessing Officer to enhance the depreciation for an amount equal to the income assessed to tax u/s 115J. Hence, the present appeal raising the above substantial questions of law.

The law on the point is now settled by the Apex court in Karnataka Small Scale Industries Development Corporation Ltd. Vs. Commissioner of Income Tax, Bangalore, wherein the view of the Andhra Pradesh High Court in Suryalatha Spinning Mills Ltd. and Another and Suryavanshi Finance and Investments and Others Vs. Union of India and Another, was approved and the ratio laid down in Lallacherra Tea Co., v. CIT was overruled.

In Karnataka Small Scale Industries Development Corporation Ltd. Vs. Commissioner of Income Tax, Bangalore, , the Apex Court held as follows:

The Division Bench of the Andhra Pradesh High Court in Suryalatha Spinning Mills Ltd. and Another and Suryavanshi Finance and Investments and Others Vs. Union of India and Another, , had construed Section 115J in favour of the Revenue, inter alia, because: "the very object of the provision of Section 115J is to tax such companies which are making huge profits and also declaring substantial dividends but are managing their affairs in such a way as to avoid payment of Income Tax, as a result of various tax concessions and incentives and for that purpose, the taxable income is determined under Sub-section (1) of Section 115J, if any loss equal to the income thus determined is allowed to be adjusted, then that would frustrate and nullify the very object enacting the provision". The reasoning appears to us to be unexceptionable.

In Lallacherra Tea Co. (P) Ltd. v. CIT, relied upon by the assessee, the Gauhati High Court was considering a case of an assessee company which had filed a return in which the total income computed was less than 30 per cent of its book profit. After computing its book profit, in terms of Section 115J(1), a sum of Rs. 74,477 was deemed to be the total income chargeable to tax for the assessment year, namely, 1987-88. In the assessment year 1988-89, the company sought to deduct the sum of Rs. 74,477 rounded off to Rs. 74,450 from its total income. The Revenue opposed this. The submission of the assessee was that the tax would not have been demanded against the amount which was adjusted. Upsetting the finding of the Tribunal, the court held in favour of the assessee on the basis of a hypothetical example which, in our view, proceeds on a complete misappreciation of Section 115J.

Following the said decision of the Apex Court, we allow the appeal and decide the above substantial questions of law in favour of the revenue and against the assessee. No costs.