M/S. SURANA STEELS PVT. LTD. ETC. ETC. vs. THE DEPUTY COMMISSIONER OF INCOME TAX AND ORS.

CIVIL APPEAL No. 4471/1995Supreme Court[1999] 2 S.C.R. 58913 April 1999Bench: 2 JudgesAuthor: S.P. BHARUCHA, R.C. LAHOTI SURANA STEELS PVT. LTD. ETC. ETC. A12 pages
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What were the facts?

The assessee, a private limited company, earned profits in assessment year 1989-90. However, due to losses incurred in earlier years after accounting for depreciation, the assessee claimed 'nil' income by setting off these past losses against the current year's profit. The Income Tax Officer disagreed, holding that only the lesser of unabsorbed depreciation or business loss could be adjusted, and since there was no business loss as per books, no set-off was permissible. This view was upheld by the CIT(A) and the Tribunal. The High Court further ruled that if a year's profit turned into a loss after depreciation adjustment, no adjustment to book profit under Section 115-J was allowed. These appeals arise from these adverse decisions.

What did the Supreme Court hold?

The Supreme Court held that assessees are entitled to set off earlier years' losses, arrived at after depreciation, against the current year's profit. The Court clarified that Section 205(1), proviso clause (b) of the Companies Act, 1956, explicitly refers to 'loss' as the amount arrived at after providing for depreciation. The words 'the amount provided for depreciation' and 'arrived at in both cases after providing for depreciation' make it clear that 'loss' in this context means post-depreciation loss. The Court found that this interpretation aligns with the object of Section 115-J of the Income Tax Act, which aims to address 'zero tax companies'. The High Court's view that no adjustment is allowed if a year's profit becomes a loss after depreciation was deemed erroneous and would partially defeat the legislative intent. The Court also disagreed with the High Court's assertion that once Section 205(1)(b) is incorporated into Section 115-J, the Companies Act is irrelevant for interpretation. The appeals by the assessees were allowed, and the appeals and SLPs by the Revenue were dismissed.

What were the issues?

1. Whether, for the purpose of Section 115-J of the Income Tax Act, 1961, the term 'loss' in clause (b) of the proviso to Section 205(1) of the Companies Act, 1956, refers to loss after depreciation or pre-depreciation loss? (Question of law) Assessee's contentions: - The assessee argued that 'loss' in the context of Section 205(1)(b) of the Companies Act, when read with Section 115-J of the Income Tax Act, means loss after accounting for depreciation. Therefore, earlier years' losses, after depreciation, could be set off against current year's profits. - Relied on the principle of legislation by incorporation, stating that the provision from the Companies Act should be read as it is. Revenue's contentions: - The revenue contended that for arriving at the adjusted book profit, only the lesser of unabsorbed depreciation or business loss could be adjusted. Since there was no business loss in earlier years as per the books of accounts, no amount could be allowed to be set off. - The High Court held that if a year's profit resulted in a loss after depreciation adjustment, no adjustment in book profit under Section 115-J was permissible.

Which sections of the Income-tax Act were involved?

Section 115-J,Section 205(1),Section 256(1),Section 256(2)

AI-generated summary — verify with the full judgment below

MIS. SURANA STEELS PVT. LTD. ETC. ETC. A v. THE DEPUTY COMMISSIONER OF INCOME TAX AND ORS. APRIL 13, 1999 [S.P. BHARUCHA AND R.C. LAHOTI, JJ.] B Income Tax Act, 1961 : S. 115-J-Assessee-Book profit-Previous years 'loss' after depreciation-Set off against current year's profit-Validity of- Held, 'loss' occurring in clause (b) of the proviso to S. 205(1) of Companies Act means 'loss' arrived at after depreciation-Assessee entitled to set off C earlier years' loss against current years profit-Object of S. 115-J Explained-- Companies Act, 1956-S. 205(1) proviso clause (b).

Interpretation of statutes Legislation by incorporation-Held, the provision is to be read plainly D and rules of interpretation to be applied if any ambiguity arises.

Words & Phrases: "Loss "-Meaning of in the context of S. 205(1), proviso clause (b) of the Companies Act, 1956 read with S. 115-J of Income Tax Act, 1961. E Appellant-assessee, a private limited company earned profit for the assessment year 1989-90. However, as it had incurred loss after depreciation in earlier years, it filed returns disclosing 'nil' income after setting off arrears of depreciation against the current year's profit

The order continues below.

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