Delhi High Court

Bhushan Steels & Strips Ltd. vs Dy. Cit on 27 February, 2003

Equivalent citations: (2004) 91 TTJ Del 108

ORDER

Keshaw Prasad, A.M.:

The appeal directed by the assessed arises out of the Commissioner (Appeals)'s order date 31-3-1997, pertaining to assessment year, 1994-95.

2. The only ground raised by the assessed relates to the disallowance of depreciation on office building.

3. Briefly, the facts of the case are that at the time of assessment, the assessing officer noted the following observations made in Item 3 of Schedule VII of the notes below the audit report

"Flats in Bombay and New Delhi costing Rs. 373.33 lakhs (previous year Rs. 21.18 lakhs) remained to be registered in the name of the company."

4. The assessing officer also noted that the assessed has claimed depreciation on such office building and debited the same to the P&L a/c. The assessing officer, therefore, asked the assessed to furnish the details of the building not yet registered in the name of the assessed in respect of which depreciation has been claimed. The assessed furnished its reply which was perused by the assessing officer. The assessing officer noted that the buildings have been taken on a lease agreement and, therefore, this was not a case of exact sale to the assessed and, therefore, the assessed did not become the owner of the property. He also held that as per the requirements of Transfer of Property Act read with Indian Registration Act, as no duly executed registered sale indenture was there, as such, there was no proper sale of the property and the assessed could not be considered to have become owner of the property under consideration. He held that as the essential ingredients of the ownership required under section 32 of the Act was not fulfillled, the depreciation on the office building at Delhi and Bombay were not allowable. On appeal, the Commissioner (Appeals) upheld the findings of the assessing officer against which the assessed is in appeal before us. Learned counsel Shri Tulsian stated that when the Commissioner (Appeals) passed the order, the decision of Hon'ble Supreme Court in the case of Mysore Minerals Ltd. v. CIT (1999) 239 ITR 775 (SC) was not available. But now the issue is squarely covered by the decision of Hon'ble Supreme Court in the case of Mysore Minerals Ltd. (supra) and in the case of CIT v. Poddar Cement Ltd. (1997) 141 CTR (SC) 67 : (1997) 226 ITR 625 (SC) on the other hand, learned Departmental Representative supported the order of the Commissioner (Appeals).

5. We have considered the rival submissions. The assessing officer had denied the claim of depreciation on two grounds, namely, there was no exact sale transaction between the Lesser and the assessed and the property was not transferred by way of registered deed as required under Transfer of Property Act. The assessed has, therefore, not become the owner of the property. We have, therefore, examined the facts of the case in greater details. The assessed company negotiated for purchase of 8,000 sq. ft. area on the first floor of International Trade Tower at Nehru Place, New Delhi, and a deal was struck off for out and out purchase. The total purchase consideration of Rs. 3.16 crores was paid during the year under consideration. As per agreement for a temporary lease of three years, the option was with the assessed to make an outright purchase at the end of three years. On making payment, the assessed company entered into immediate possession, of the premises. An agreement dated 17-4-1993, was executed in this regard according to which the assessed had the absolute discretion of option to purchase the property against the settled consideration. A no objection certificate was obtained from the appropriate authority of the IT department which was required in the case of sale of an immovable property. It appears that looking to these facts, the assessing officer felt that this was only a case of lease and not transfer. But while doing so, he completely omitted certain important facts in this case. As per section 2(47) of the Act, the "transfer" 'in relation to a capital asset includes any transaction whether by way of becoming a member or acquiring shares in a co-operative society, company or other Association of Person or by Way of agreement or any arrangement or in any other manner whatsoever which has the effect of transferring or enabling the enjoyment of any immovable property. Even clause (v) of section 2(47) prescribes that transfer includes any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act.

6. Looking to the above definition of the word "transfer" as mentioned in section 2(47), there is no dispute that the possession of the property has been already given to the assessed and the assessed was enjoying the property. The only question arises as to whether the lease under which the assessed got the possession of the property and the enjoyment thereof was revocable or not. As mentioned earlier, the assessed had option for an outright purchase of the property. The agreement also provided that the option of the assessed- company to purchase the leased property at the stipulated price of Rs. 3.36 crores shall not be rejected by the vendor-company under any circumstances for any reason whatsoever. It also provided that any subsequent extension of lease shall not destroy the above right of purchase by the assessed-company. Para 5 of the agreement mentions the liability to the assessed to pay initially its contribution to the sinking fund for the replacement of capital goods like air-conditioning, plant, generators, machinery, electrical equipments and cables, etc. Clause (vi) of the lease deed also specified the efforts to be made by the vendor-company for obtaining all such permission from the Government as are necessary to carry on the sales and operations. The agreement also refers to the rights of the assessed- company to specific performance of the contract in the event of failure on the part of vendor-company to carry out the sale operation in a court of law at the cost and risk of the vendor-company. From various clauses of the agreement, it is clear that there was actually an intention of sale of property between the two parties concerned for which the major portion of sale consideration was duly paid by the assessed- company and was put to possession of the property immediately. For the balance amount of Rs. 20 lakhs, the assessed was required to pay the interest in the form of lease rent. All these facts clearly indicate that this was a case of transfer. Bulk of the sale consideration has been paid by the assessed, the assessed has been put into possession of the property, the necessary arrangements have been made for payment of the balance amount and the vendor-company had no right to rescind such agreement, this was a case of transfer. We, therefore, hold that the actual transfer of the property has taken place within the meaning of section 2(47) of the Act.

7. As regards the assessing officer's objection to the effect that the property has not been registered in the name of the assessed- company and, therefore, it has not become the legal. owner of the property within the meaning of section 32, we find that similar issues were considered by the Hon'ble Supreme Court in the case of Poddar Cement Ltd. (supra) and Mysore Minerals Ltd. (supra). Though Hon'ble Supreme Court in the case of Poddar Cement Ltd. (supra) was concerned with the definition of the word "owner" for the purposes of income from house property, the Hon'ble Supreme Court in the case of Mysore Minerals Ltd. (supra) had considered this very issue. In the said judgment, the Hon'ble Supreme Court held that section 32 confers a benefit on the assessed and hence the provisions shall be so interpreted and words used therein should be assigned such meaning as would enable the assessed to secure the benefits intended to be given by the legislature to the assessed. In deciding the issue in favor of that particular assessed, as to whether that assessed would be entitled to depreciation on an immovable property even in the absence of a registered deed, the Hon'ble Supreme Court made the following observations :

"Section 32 of the Act allows certain deductions, one of them being depreciation of buildings, etc., owned by the assessed and used for the purpose of the business or profession. The terms "own", "ownership" and "owned" are generic and relative terms. They have a wide and also a narrow connotation. The meaning would depend on the context in which the terms are used. CIT v. Poddar Cement (P) Ltd. (1997) 226 ITR 625 (SC), is a case under the Income Tax Act and has to be taken as a trend-setter in the concept of ownership. Assistance from the law laid down therein can be taken for finding out the meaning of the term "owned" as occurring in section 32(l) of the Act. The term owned as occurring in section 32(l) of the Income Tax Act must be assigned a wider meaning. Anyone in possession of property in his own title exercising such dominion over the property as would enable others being excluded there from and having the right to use and occupy the property and/or to enjoy its usufruct in his own right would be the owner of the building though a formal deed of title may not have been executed and registered as contemplated by the Transfer of Property Act, the Registration Act, etc. "Building owned by the assessed", the expression as occurring in section 32(l) of the Income Tax Act, means a person who having acquired possession over the building in his own right uses the same for the purposes of the business or profession though a legal title has not been conveyed to him consistently with the requirements of law such as the Transfer of Property Act and the Registration Act, etc. Generally speaking, depreciation is an allowance for the diminution in the value due to wear and tear of a capital asset employed by an assessed in his business. The very concept of depreciation suggests that the tax benefit on account of depreciation legitimately belongs to one who has invested in the capital asset and is utilising the capital asset and thereby losing gradually the investment caused by wear and tear, and would need to replace the same by having lost its value fully over a period of time. It is well-settled that there cannot be two owners of the property simultaneously and in the same sense of the term. The intention of the legislature in enacting section 32 of the Act would be best fulfillled by allowing deduction in respect of depreciation to the person in whom for the time being vests the dominion over the building and who is entitled to use it in his own right and is using the same for the purposes of his business or profession. Assigning any different meaning would not subserve the legislative intent."

8. In view of the clear-cut pronouncements on the part of the Supreme Court in the abovementioned cases, the tax benefit on account of depreciation legitimately belongs to the one who has invested, in the capital assets and using the same and thereby losing correctly the investment caused by wear and tear. In our opinion, the issue is squarely covered in favor of the assessed by the decision of Hon'ble Supreme Court mentioned above and respectfully following the same, we hold that the assessed is entitled to depreciation on the building even in absence of duly executed registered conveyance deed in its favor. We, accordingly direct the assessing officer to allow depreciation on the office buildings in Bombay and Delhi owned by the assessed though the same have not been registered in the name of the assessed. The ground of appeal raised by the assessed is accordingly allowed.

9. In the result, the appeal filed by the assessed is allowed.

10. Now, we will take up the appeals directed by the revenue. There are certain common issues in all the years and, therefore, all these appeals are being'. disposed of by a consolidated order. For the sake of convenience, we will first take up the appeal directed by the revenue for assessment year 1995-96.

11. The first issue raised by the revenue relates to the allowance of depreciation on the building which is yet to be registered in the name of the assessed- company.

12. We have adjudicated this issue in the assessed's appeal for assessment year 1994-96. In that year, the assessing officer/Commissioner (Appeals) had disallowed the depreciation by holding that there was no real transfer of the property and also the assessed has not become the owner of the property in absence of registered conveyance deed. When the Commissioner (Appeals) had passed the order in that year, the decision of the Hon'ble Supreme Court in the case of Mysore Minerals Ltd. (supra) was not available. The assessed was, therefore, in appeal before us which we have adjudicated earlier. But in the year under consideration, the Commissioner (Appeals) has allowed depreciation on such building by following the decision of Hon'ble Supreme Court in the case of Poddar Cement Ltd. (supra), The revenue is in appeal before us against the findings of the Commissioner (Appeals).

13. We have adjudicated this issue in the assessed's appeal for assessment year 1994-95 wherein we have held that the assessed was entitled for depreciation on such office building. In view of our findings therein, we do not find any substance in the submissions of the revenue and accordingly uphold the findings of the Commissioner (Appeals). The ground of appeal raised by the revenue is dismissed.

14. The next issue raised by the revenue relates to the treatment of the amount received by the assessed- company from the State Government by way of exemption/reduction of sales-tax.

15. Briefly, the facts of the case are that the assessed is running the business of manufacture of cold rolled/galvanised steel strips and sheets, etc. Its two units, namely, cold rolling, coal units and galvanised unit are located at Sahibabad (Distt. Ghaziabad-UP). The area is notified as a backward area. The assessed claimed that in terms of Notification No. ST-2-7558/X-9(208) 1981-UP ActXV/48-Order-85, dated 26-12-1985, the UP Government in exercise of powers under section 4(a) of the UP ST Act read with section 2(21)of UP General Clauses Act, 1904, granted exemption from payment of the sales-tax in respect of any goods manufactured in an industrial unit which is a new unit located in specified backward area and that such exemption has been allowed for a period of six years. It was stated that a new unit of the company went into production on and with effect from 1-4-1990, and the eligibility certificate in respect of this unit effective from 7-3-1990, was issued by the Industries department on 3-7-1992. The assessed also claimed that in terms of Notification No. ST-21093/11-7(42)/86-UP Act, dated 27-7-1991, issued by the Government in exercise of powers under section 4(a) of UP ST Act read with r. 25 of the UP Sales Tax Rules, certain exemption of sales-tax was granted to the industries set up -in the speoified backward area. The assessed- company's a galvanising unit started production in January, 1994, the eligibility certificate in respect of this unit was issued by the Industries department effective from 19-1-1994. The exemption in -terms of the notification dated 27-7-1991, in respect of galvanising unit was available up to a period of 8 years based on fixed capital investment. As both the units were located at Sahibabad (Distt. Ghaziabad-UP) and were a specified area, while filing the return of income, the grant of exemption given by the State Government vide abovementioned notifications with the object of promoting and development of industries was inadvertently not taken into consideration notwithstanding the fact that the subsidy allowed in the form of exemption was in the nature of a capital grant. However, subsequently, the assessed revised, its return of income claiming that such amount of sales-tax was in the nature of capital subsidy. Such amount came to Rs. 7,27,71,570. During the course of assessment proceedings, the assessed also relied on various decisions reported as CIT v. Tirmurnala Bricks & Tmles Factory (1996) 217 ITR 547 (AP), 217 ITR 757 (AP) (sic), Tribunal Bombay decision dated 27-4-1994, in ITA No. 1418 and the decision reported in CIT v. P.J Chernicals Ltd., Etc. Etc. (1994) 210 ITR 830 (SC). However, the claim of the assessed did not find favor with the assessing officer. In his order, the assessing officer made the following observations :

(a) There is no doubt that the amount of Rs. 7,27,71,570 represents the income of the assessed- company. This issue had already been settled finally by several judgments of the Hon'ble Supreme Court of India e.g., Chowringee Sales Bureau (P) Ltd. v. CIT (1973) 87 ITR 542 (SC) and Sinclair Murray & Co. (P) Ltd. v. CIT (1974) 97 ITR 615 (SC). The assessed's claim for deduction of this amount from its taxable income on the ground that sales-tax has been exempted by the State Government in the form of subsidy for installing industrial units in backward areas does not help it at all. Section 43B opens with an overriding clause making it obligatory that any deduction of a sum "payable by the assessed by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force", can be allowed if such sum is actually paid by the assessed. The assessed has admittedly not paid the amount of sales-tax collection to the State Government.

(c) The assessed's assertion that it is entitled to claim deduction in view of subsidy by virtue of notifications issued by the State Government does not help its case as provisions of section 43B are clear and non-ambiguous as well as overriding in nature.

(d) The assessed's reference to several judgments of the High Courts and judgment of Supreme Court in the case of CIT v. P.J. Chernicals Ltd., Etc. Etc. (1994) 210 ITR 830 (SC) is not relevant as the issue before the courts was determination of "actual cost" of capital assets for the purpose of grant of depreciation and not the grant of deduction in respect of sales-tax collections which had not been paid in accordance with the provisions of section 43B of the Income Tax Act.

(e) No objection on the issue whether the assessed's industrial undertaking was set up in a backward area notified by the Central Government for the purpose of benefit under provisions of Chapter VI-A of Income Tax Act is necessary at this state as the issue concerning assessed's claim is clearly covered by section 43B of the Act. "

16. The assessing officer, therefore, disallowed the claim of deduction. On appeal, the Commissioner (Appeals) allowed the claim of the assessed. While doing so, the Commissioner (Appeals) held that the amount of sales-tax collected by way of incentive for setting up industries in backward areas was not subject to tax as a trading receipt. He, therefore, deleted the addition of Rs. 7,27,71,570 made by the assessing officer. The revenue is in appeal before us against the findings of the Commissioner (Appeals).

17. Learned Departmental Representative vehemently opposed the findings of the Commissioner (Appeals). On the other hand, learned counsel argued that the Commissioner (Appeals) has given sound reasoning while allowing the claim of the assessed and, therefore, -the revenue's appeal on this ground deserves to be dismissed.

18. We have considered the rival submissions. It appears that while disallowing the claim of the assessed, the assessing officer had in mind the ratios laid down by the Hon'ble Supreme Court in the case of Sinclair Murray & Co. (P) Ltd. (supra) and Chowringhee Sales Bureau (P) Ltd. (supra) wherein it was held that sales-tax collected was part of trading receipts. As the same has not been paid within the time allowed under proviso to section 43B of the Act, the deduction was not allowable. However, the Commissioner (Appeals) had treated the amount of sales-tax collected by the assessed as a capital subsidy and while relying on the decision of Hon'ble Supreme Court in the case of P.J. Chernicals (supra) held that the amount received by the assessed was not a trading receipt.

19. As mentioned earlier, the units of the assessed- company are located in Distt. Ghaziabad (UP). The particular area has been notified to be specified area. The UP Government vide its notification mentioned earlier notified that the State Government was of the opinion that for promoting the development of certain industries in the estate, it was necessary to grant exemption from/or reduction in rate of tax to new unit and also to units which have undertaken expansion, diversification or modernisation, no tax shall be payable in respect of any goods manufactured in the new unit on or after 1-4-1991, tin 31-3-1995, till the maximum amount of tax/relief by such exemption was achieved. The amount of tax exemption allowed to the assessed was on the basis of fixed capital investment made by the assessed. Sales Tax Department vide its letter dated 23-12-1998, applicable for the period 1-4-1990 to 31-3-1995, also notified the name of the assessed- company which was eligible for exemption. There is no doubt about the fact that since the appellant- company was exempted from the payment of sales-tax in terms of two schemes as per the relevant notification of the Government of UP, no actual payment of sales-tax amount in financial terms was effected. There is no doubt about the fact that but for the notification, the appellant- company would have been under the obligation to make payments of the sales-tax amount. In terms of notification, the appellant- company instead of paying sales-tax and receiving subsidy separately from the State Government has been able to mutually adjust the two things and thus been freed from making payment of sales-tax amount.

20. As regards the assessing officer's observations that the amount of sales-tax collected by the assessed was disallowable under section 43B of the Act because the same has not been paid within the due dates mentioned in proviso to section 43B, we find that section 43B says that "notwithstanding anything contained in any other provisions of this Act, any sum payable (emphasis, italicized in print, supplied), by the assessed by way of taxes, etc. shall be allowable as deduction in the previous year in which such sum is actually paid." The first question, therefore, arises as to whether the amount of sales-tax collected by the assessed was payable by the appellant- company or not. The Government notification clearly exempts the assessed from payment of any such sum for a specified period. Till that period is over, it cannot be said that any such tax was payable by the assessed. Thus, in view of the provisions of section 43B, the amount cannot be disallowed as the amount was not payable by the assessed in view of the UP Government notification mentioned earlier. In this connection, reference may also be made to the Circular No. 496, dated 25-9-1987, issued by the CBDT reproduced in (1988) 169 ITR (SC) 53 dealing with the question of applicability of section 43B to the cases of the deferment of sales-tax payment under the State Government Scheme. The CBDT directed that if the State Government would make an amendment in the ST Act to the effect that the sales-tax deferred under the scheme shall be treated as actually paid, such a deeming provision will meet the requirement of section 43B of the Act. In the present case, the two schemes of the UP Government allowing exemption/reduction in the sales-tax are recognised through requisite statutory gazette notification and hence have got statutory administrative sanction. The exemption/reduction provision in the scheme negate the requirement of sales-tax payment and hence the question of actual payment of sales-tax to that extent does not arise at all. In view of these facts, we hold that no amount was disallowable under section 43B of the Act.

21. Coming to the next issue as to whether the amount collected by the assessed by way of sales-tax for a specified period which was not payable to Government, was a subsidy granted by the State Government and, therefore, was a capital receipt, we find that in its grounds of appeal, the revenue has pleaded that the amount received by the assessed was part of trading receipt and, therefore, the provisions of section 43B of the Act were applicable. We have, therefore, examined the notification of the Government in this regard. The notification dated 26-12-1985, starts with the word "whereas the State Government is of the opinion that it is necessary so to do for promoting the development of industries in the State generally and in certain districts and parts of the districts in particular". The purpose behind such notification was the development of industries in the State. Notification dated 27-7-1951, also specified the same purpose. The exemption/reduction of sales-tax was to be computed on the basis of capital investment of the assessed. In other words, the incentive was given to the assessed to establish industrial unit in the specified areas. The State Governments come out with similar schemes for promoting the industries, the Government grants certain subsidies for the same. Instead of granting subsidies which was also relatable to the capital invested by the assesses or the investment in the fixed assets, the UP Government thought if fit not to give any amount by way of subsidy and then collect the same by way of sales-tax. The Government, therefore, quantifies the subsidies payable by it to various industries in the specified areas and instead of giving such subsidy to them, the Government exempted the industries from paying the sales-tax collected to the extent of quantified amount. It will not be out of place to mention that the amount of sales-tax collected exceeding the computed amount, the assessed was liable to pay such excess sales-tax collected. In this connection, we feel it expedient to consider the decision of the Hon'ble Supreme Court in the case of Sawhney Steels & Press Works Ltd. v. CIT (1997) 228 ITR 253 (SC). The Hon'ble Supreme Court in this case decided that if the moneys are given to the assesseds for assisting them in carrying out their business operation and the money was given only after and conditional upon commencer nefit of the production, such subsidy must be treated as assistance for the purpose of trade. But insofar as the case before us is concerned, the subsidy is granted to the appellant-company by the State Government not for the purposes of carrying on its business in a more profitable manner but merely in consideration of setting up the production units in backward areas. The purpose of the State Government in granting subsidy is clear from the preamble portion of the two notifications under which the appellant- company became entitled to exemption in respect of sales-tax amount.

22. Though the subsidy/grant allowed by the Government apples to be in the nature of exemption/reduction in the amount of sales-tax payable by the appellant- company, actually, however, the sales-tax amount is simply a measurement of the subsidy to be allowed by the State Government. The subsidies are purely gratuitous in nature and cannot be considered to be an assistance provided to t4e appellant- company for carrying on its business operation in a day-to-day manner. On the other hand as discussed earlier, the subsidy has been granted speoially for the purpose of promotion and development of the industries in the backward areas of the State. In the case of Senai Ram Dungermall v. CIT (1961) 42 ITR 392 (SC) at 397, the Hon'ble Supremo Court held that it is the quality of the payment that is decisive of the character of the payment and not the method of the payment or its measure that makes it fall within capital or revenue. Hon'ble Supreme Court in the case of P.J. Chemicals Ltd. (supra) held that, where the Government subsidy is intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries, the specified percentage of the fixed capital cost which, is the basis for determining the sales being only a measure adopted under the scheme to quantify the financial aid was not a payment directly or indirectly to meet any operation of actual cost of such fixed assets. Hon'ble Calcutta High Court in the case of CIT v. Balrampur Chini Mills Ltd. (1999) 238 ITR 445 (Cal) has considered similar issue. In this particular case, the Government introduced an incentive scheme 1975 for the purpose of overcoming the problem of shortage of sugar. One of the incentives envisaged was increase in the free sale sugar quota. To avail the benefit of the scheme that assessed took certain loans from the Government -financial institution for expansion of factory by which it was able to raise the capacity of the factory considerably by way of increasing per day crushing capacity. The Hon'ble court held that though the subsidy was in the form of realisation of certain additional. sale proceeds and in that way looked like trading receipts actually, however, it was of the nature of an incentive allowed by the State Government for the purpose of expansion of capacity of the mill of the assessed and in that way the incentive expressed in terms of additional sale of sugar was of the nature of capital receipt, The Tribunal, Calcutta Bench in the case of Rasoi Ltd. (ITA No. 1080/Cal/1998) and in the case of Pharma Impex Laboratory (P) Ltd. (ITA No. 476/Cal/2000) and Tribunal, Bangalore Bench in the case of Hindustan Aeronautics Ltd., Bangalore (ITA No. 763/Bang/1998) have taken the same view even after considering the decision of Hon'ble Supreme Court in the case of Sawhney Steels & Press Works Ltd. (supra). In view of these facts, we have no hesitation in holding that the amount received by the assessed by way of exemption of sales-tax payment, was not a trading receipt and, therefore, the Commissioner (Appeals) has rightly held' that the amount received by the assessed was capital receipt and not liable to tax up to the limits computed in accordance with the notification of the State Government. While upholding the finding of the -Commissioner (Appeals), we dismiss the ground of appeal raised by the revenue.

23. In the result, the appeal directed by the revenue is dismissed.

24. In the assessment year 1996-97, the revenue has raised two grounds relatable to the depreciation on building as well as the amount of sales-tax collected but exempted from payment.

25. We have adjudicated both the issues in the assessment year 1995-96 and in view of our findings therein, both the grounds of appeal raised by the revenue are dismissed.

26. In the result, the appeal directed by the revenue is dismissed.

27. In the assessment year 1997-98, the ground. Nos. 2 and 3 related to the amount of sales-tax collected and the depreciation on the office building.

28. We have adjudicated both the issues in the assessment year 1995-96 and in view of our findings therein, both these grounds of appeal raised by the revenue are dismissed.

29. Ground No. 1 raised by the revenue related to the computation of book profits under section 11 5JA of the Act.

30. Briefly, the facts of the case are that during the course of assessment proceedings, the assessing officer noted that as per computation of income attached along with the return, the assessed has computed its income under section 115JA of the Act as under

(Rs.)

"Book profit as per P&L a/c

40,96,95,411

Less .- Amount transferred from general reserve liable to MAT

1,87,32,413

Book profit under section 115JA

22,23,71,273

30% of the book profit

6,67,11,382"

31. The assessing officer also examined the P&L a/c ended 31-3-1997, and found that the assessed has worked out profit before depreciation at Rs. 53,51,56,114. From this figure, the assessed has deducted depreciation of Rs. 12,54,60,703 (depreciation of Rs. 31,27,84,841 minus 18,73,24,138 transferred from general reserve). Thus, profit before tax came to Rs. 40,96,95,411. But while computing book profit under section 115JA, the assessed has reduced the sum of Rs. 18,73,24,138 on the ground that the same represented credit amount withdrawn from the general reserves to the P&L a/c and in view of clause (1) of Explanation below 2nd proviso to section 115JA, the amount withdrawn from any reserve and credited to the P&L a/c, shall be reduced from the book profit. The assessing officer, therefore, examined the claim of the assessed. He observed that it is to be examined as to what necessitated the assessed to change the method of providing depreciation and whether the depreciation of earlier years by such change of method would be charged to the P&L a/c of the current year. The assessing officer discussed the issue in great details and by placing reliance on the decision of Hon'ble Kerala High Court in the case of CIT v. Apollo Tyres (1998) 149 CTR (Ker) 538 : (1999) 237 ITR 706 (Ker) held that earlier year's depreciation cannot be charged to the profit of the current year. He computed the income of the assessed under section 115JA accordingly. On appeal, the Commissioner (Appeals) held that the change in the method of providing depreciation was not mala fide. This was in consonance with the Accounting Standard 6 published by the Institute of Chartered Accountants of India. By relying on certain decisions, the Commissioner (Appeals) held that the arrears of depreciation were chargeable against the profits of the current year. He, therefore, upheld the working of book profit under section 115JA of the Act as submitted by the assessed. The revenue is in appeal before us against the findings of the Commissioner (Appeals).

32. While learned Departmental Representative supported the order of the assessing officer, the learned counsel Shri S.K. Tulsiyan stated that the assessing officer had relied on the decision of Hon'ble Kerala High Court in the case of Apollo Tyares (supra) while rejecting the claim of the assessed. But since the said decision of the Hon'ble Kerala High Court in the case of Apollo Tyares (supra) has been reveised by the Hon'ble Supreme Court, the Commissioner (Appeals)'s order was in accordance with law and deserves to be upheld.

33. We have considered the rival submissions. The provisions of section 11 5JA under which the book profits have been computed read as under :

"115JA. (1) Notwithstanding anything contained in any other provisions of this Act, where in the case of an assessed, being a company, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1-4-1997, but before the 1-4-2001 (hereinafter in this section referred to as the relevant previous year), is less than thirty per cent of its book profit, the total income of such assessed chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit.

(2) Every assessed, being a company, shall, for the purposes of this section prepare its P&L a/c 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)

Provided that while preparing P&L a/c, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the P&L a/c laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956)

Provided further that where a company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1966), which is different from the previous year under the Act, the method and rates for calculation of depreciation shall correspond to the method and rates which have been adopted for calculating the depreciation for such financial year or part of such financial year falling within the relevant previous year.

Explanation : For the purposes of this section, "book profit" means the net profit as shown in the P&L a/c for the relevant previous year prepared under sub-section (2), as increased by-

(a) the amount of income-tax paid or payable, and the provisions therefor; or

(b) the amounts carried to any reserve by whatever name called; or

(d) the amount by way of provision for losses of subsidiary companies; or

(e) the amount or amounts of dividends paid or proposed; or

(f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies; if any amount referred to in clauses (a) to (f) is debited to the P&L a/c and as reduced by,-

(i) the amount withdrawn from any reserves or provisions if any such amount is credited to the P&L a/c :

Provided that, where this section is applicable to an assessed 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 1-4-1997, but ending before the 1-4-2001, shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation, or

(ii) the amount of income to which any of the provisions of Chapter III applies, if any such amount is credited to the P&L a/c; or

(iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account.

Explanation : For the purposes of this clause,-

(a) the loss shall not include depreciation;

(b) the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation, is nil; or

(iv) the amount of profits derived by an industrial undertaking from the business of generation or generation and distribution of power; or .

(v) the amount of profits derived by an industrial undertaking located in an industrially backward State or district as referred to in sub-section (4) and sub-section (5) of section 80-IB, for the assessment years such industrial undertaking is eligible to claim a deduction of hundred per cent of the profits and gains under sub-section (4) or sub-section (5) of section 80-IB; or

(vi) the amount of profits derived by an industrial undertaking from the business of developing, maintaining and operating any infrastructure facility as defined in the Explanation to sub-section (4) of section 80-IA and subject to fulfillling- the conditions laid down in that sub-section; or

(vii) the amount of profits of sick industrial company for the assessment year commencing from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986), and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulatdd losses,

Explanation : For the purposes of this clause, "net worth" shall have the meaning assigned to it in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986); or

(viii) the amount,of profits eligible for deduction under section 80HHC, computed under clause (a), (b) or (c) of sub-section (3) or sub-section (3A), as the case may be, of that section, and subject to the conditions specified in sub-sections (4) and (4A) of that section;

(iv) the amount of profits eligible for deduction under section 80HHE, computed under sub-section (3) of that section."

34. In . its accounts for this year, the appellant- company charged total depreciation at Rs. 3,127.85 lakhs which included Rs. 1,873.24 lakhs, being arrears of depreciation for earlier years in respect of its cold rolling mills on account of change in the method of calculation of depreciation from straightline method to written down value method. On the other hand, the appellant-company transferred an identical amount of Rs. 1,873.24 lakhs from its general reserves to the credit side of the P&L a/c. For the purpose of computing the adjusted book profit, the appellant- company has claimed deduction of the amount of Rs. 1,873.24 lakhs transferred from the general reserve in terms of the provisions of clause (i) of Explanation below second proviso to section 115JA of the Act. The assessing officer has firstly tried to raise the issue that charging of arrears of depreciation having been made out of transfer from the general reserve, there would be no question of allowing the same against current year's profit, Alternatively, he stated that the arrears of earlier depreciation cannot in any case be charged against the current year's profit. In this connection, he has brought in the significance of entries made in the accounts "above the line" and "below the line" and has stated that all entries relating to prior period are required to be made below the line and, hence such entries cannot be counted for the purpose of arriving at the book profit. While rejecting the claim of the assessed, the assessing officer has mainly made the following observations

"I The assessing officer has got the right to verify the correctness of the P&L a/c drawn by the assessed.

II. Although the Companies Act does not contain any specific/mandatory provisions regarding the circumstances in which the assessed can change its method of providing depreciation, yet the said change must be bona fide. The assessing officer holds that in the present case, there were no bona fide reasons for the appellant-company to change its method of depreciation in case of its cold rolling mills alone and that the entire exercise in that regard has merely been a camouflage.

III. There was no mandatory requirement for the appellant- company to change its method of calculating depreciation with retrospective effect.

The Companies Act does not contain any specific/mandatory provisions prescribing that depreciation relating to earlier years on account of change of method has to be necessarily a charge to profit of the year in which the change was effected. On the other hand, it is not permissible to charge such arrears of depreciation to the current year's'profits. In arriving at this conclusion, the assessing officer has heavily relied on the judgment of the Kerala High Court in the case of Apollo Tyres Ltd. (supra) and also in the order of the Tribunal, Madras, in the case of Sri Rajendra Mills Ltd. v. Dy. CIT in ITA No. 1231/Mad/1992, dated 7-9-1998 ((1999) 63 TTJ (Mad) 697). Ultimately, the assessing officer has disallowed the claim of deduction from the current year's book profit, not only of the arrears of depreciation for the earlier years, but also the additional depreciation of Rs. 134.78 lakhs for the current year occurring on account of change in the method of calculating the depreciation".

35. It will be thus seen that main plank of the departmental arguments in this regard was the judgment of Hon'ble Kerala High Court in the case of Apollo Tyres (supra). The said decision was challenged before the Hon'-ble Supreme Court. In that case also, while determining its book profit for the relevant year, the arrears of depreciation were charged against the profits of the current year which according to the revenue was not in accordance with, Part II and Part III of Schedule VI of the Companies Act, 1956. The assessing officer recomputed the book profit and excluded the provisions made in respect of arrears of depreciation. When the assessing officer's order was confirmed by the Hon'ble Kerala High Court, the issue was taken up further before the Hon'ble Supreme Court, inter alia, the following question came up for the consideration of the Hon'ble Supreme Court -.

"Can an assessing officer while assessing a company for income under section 115J of the Income Tax Act, question correctness of the P&L a/c prepared by the assessed- company and certified by statutory auditor of the company as having been prepared in accordance with the requirements of Parts II and III of Schedule VI to the Companies Act."

36. The Hon'ble Supreme Court adjudicated this issue and vide its judgment reported in Apollo Tyres Ltd. v. CIT (2002) 255 ITR 273 (SC) held as under :

"The assessing officer, while computing the book profits of a company under section 115J of the Income Tax Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having 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 section 115J. The assessing officer does not have the jurisdiction to go behind the net profits shown in the P&L a/c except to the extent provided in the Explanation. The use of the words "in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act" in section 115J was made for the limited purpose of empowering the assessing officer to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the assessing officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinised and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examineand be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-section (1A) of section 115J does not empower the assessing officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company."

37. Similar issue also came up for consideration before Delhi Bench of the Tribunal in the case of Bindal Agro Ltd. (ITA No. 1359/Del/1994). While relying on the judgment of the Hon'ble Supreme Court in the case of Apollo Tyres (supra), the Bench held that while working out book profit under section 115JA, the arrears of depreciation have to be excluded from the current year's profit. The provisions of sections 115J and 115JA are similar. In the case before us, there is no dispute that the P&L a/c of the current year has been prepared in accordance with Parts II and III of Schedule VI of the Companies Act. Such accounts have been scrutinised and certified by the statutory auditors and the same have been approved by the appellant- company in its general meeting and have been also filed with the Registrar of Companies. Thus, all the conditions mentioned in section 115JA of the Act are complied with. Respectfully following the judgment of the Hon'ble Supreme Court in the case of Apollo Tyres (supra), we hold that the Commissioner (Appeals) has rightly allowed the claim of the assessed. While upholding his findings, we dismiss the ground of appeal raised by the revenue.

38. In the result, the appeal filed by the revenue is dismissed.

39. In the (sic-appeal for) assessment year 1998-99, directed by the revenue, ground Nos. 1 and 3 related to the computation of book profit under section 115JA and the treatment of the sales-tax subsidy received.

40. We have adjudicated both these grounds in the earlier years and in view of our findings therein, both the grounds raised by the revenue have no force and these are dismissed.

41. In ground No. 3, the revenue has challenged the deletion of levy of interest under section 234B of the Act.

42. When the assessing officer levied interest under the above section, the Commissioner (Appeals) deleted the same by stating that wherever the income was computed under the deeming provisions of section 116JA, no interest under sections 234B and 234C of the Act was leviable. While doing so, the learned Commissioner (Appeals) relied on the decisions of Delhi Bench of the Tribunal in the case of Steel Authority of India Ltd. v. Dy. CIT (1991) 38 ITD 193 (Del) and the decision of Hon'ble Karnataka High Court in the case of Kwality Biscuits Ltd. v. CIT (2000) 243 ITR 519 (Kar). The revenue is in appeal before us against the findings of the Commissioner (Appeals).

43. While learned Departmental Representative supported the order of the assessing officer, the learned counsel supported the order of the Commissioner (Appeals).

44. We have considered the rival submissions. Whether the interest under section 234B/234C was chargeable on the income computed, under the provisions of section 115J of the Act or not was considered by various Benches of the Tribunal and the Hon'ble High Court. In the cases reported in Tej International (P) Ltd. v. Dy. CIT (2000) 69 TTJ (Del) 650 and Dy. CIT v. Punjab Fibres Ltd. (1999) 105 Taxman 109 (Del)(Mag) and (2000) 159 CTR (Kar) 316 : (2000) 243 ITR 519 (Kar) (supra), it has been held that no interest under the above section was chargeable. The Delhi Bench of the Tribunal in the case of Bindal Agro Chem. Ltd. (supra) also considered this issue and vide its order dated 3-2-2003, held that where the income was computed under section 115J of the Act, the interest under section 234B/234C was not chargeable. In view of various decisions mentioned above, we hold that the Commissioner (Appeals) has rightly held that the interest under section 234C was not chargeable. While upholding his findings, we dismiss the ground of appeal raised by the revenue. The appeal filed by the revenue is dismissed.

45. In the net result, the appeal filed by the assessed is allowed and all the appeals directed by the revenue are dismissed.