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Income Tax Appellate Tribunal, ‘D’ BENCH : CHENNAI
Before: SHRI ABRAHAM P. GEORGE & SHRI DUVVURU RL REDDY]
per the ld. Authorised Representative, assessee in the earlier years had provided depreciation on windmills at the rate specified in clause (II)
(i) (a) of Schedule XIV of Companies Act, @10.34%. However, as per the ld. Authorised Representative during the previous year relevant to the impugned assessment year, assessee had decided to adopt the rate @5.28% as provided in clause (II)(i)(b) of Schedule XIV of the Companies Act. As per the ld. Authorised Representative, this re- working resulted in excess depreciation for the period 2004-05 to 2007-08, and such excess came to �5,62,25,123/-. Contention of the ld. Authorised Representative was that for assessment years 2004-05 and 2005-06 taxes were computed under regular provisions, since income under regular provisions were more than book profit u/s.115JB of the Act. However, as per the ld. Authorised Representative, for assessment years 2006-07 and 2007-2008, taxes were computed based on book profits under Section 115JB of the Act. Corresponding depreciation for these two years, which formed part of the total amount of �5,62,25,123/- transferred by the assessee from Depreciation Reserves, came to �1,27,12,073.- Relying on Explanation (1) (i) to Section 115JB (2) of the Act, ld. Counsel
ITA No. 1201/2015. :- 4 -: submitted that amounts withdrawn from reserves had to be reduced from the profits while computing the income for the purpose of application of Section 115JB of the Act.
Viz-a-viz FBT, contention of the ld. Authorised Representative 4. was that CBDT circular No.8/2005, dated 29.08.2005 clearly stated that FBT was an allowable deduction while computing profits for application of 115JB of the Act.
Per contra, ld. Departmental Representative, strongly supporting the orders of the authorities below submitted that assessee had not filed any appeal on the order passed, by the ld. CIT u/s.263 of the Act. According to him, ld. CIT had analyzed Explanation (1) (i) of Section 115JB(2) of the Act and found that contentions of the assessee were entirely wrong. As per the ld. DR, assessee could not show any reason for granting relief.
We have considered the rival contentions and perused the 6. orders of the authorities below. Impugned assessment order which was confirmed by the ld. Commissioner of Income Tax (Appeals), was passed by the ld. Assessing Officer, pursuant to a direction of ld. CIT u/s.263 of the Act. Ld. Commissioner of Income Tax had held the original assessment done by the ld. Assessing Officer u/s.143(3) of the Act as erroneous and prejudicial to the interest of the Revenue for a ITA No. 1201/2015. :- 5 -: reason that assessee had wrongly deducted a sum of �5,62,25,123/- while computing profits for the purpose of Section 115JB of the Act.
Ld. Commissioner of Income Tax had held that such amounts which were transferred from depreciation reserves, were hit by Explanation (1) (i) of Section 115JB(2) of the Act. Assessee had computed the book profit as under:-
Profit as per Profit and Loss Account 7,18,18,949 Less: Agricultural income 97,808 Amount transferred from Depreciation Reserve (vide Page 22 of the Annual Report) 5,62,25,123 Provision for FBT 10,00,000 Book Profit under Section 115JB 5,73,22,931
1,44,96,018 As per the assessee the sum of �5,62,25,123/- which was deducted by it, from its profit as per profit and loss account, was on account of change in the depreciation method and adoption of 5.28% as depreciation rate for windmills against 10.34% applied by it, for assessment years 2004-05 to 2007-08. Question in our opinion can easily be resolved if we look at it from the effect of the depreciation on book profits for various years. If assessee had adopted depreciation @5.28% in the earlier years instead of 10.34%, definitely its book profit for such earlier years would have been proportionately
ITA No. 1201/2015. :- 6 -: higher. Tax payable u/s.115JB of the Act, if income computed under the said Section was more that the income computed under normal provisions, would have proportionately gone up.
First stage of the process of computation of income of a company is computation under normal provisions of the Act. Section stage is computation of its book profits for purpose of Section 115JB of the Act. Result of these takes us to the third stage which is to determine which one of these higher. Last stage of this process in no way affects the former two stages. Quantum of profits computed for the purpose of application of Section 115JB of the Act remains the same, irrespective of the selection made in the third stage. Just because income under normal provisions were more, we cannot say that computation done under Section 115JB of the Act can be ignored or can be interfered with. It has to be done as per the mandate under Section 115JB of the Act. It is true that assessee was well within its right to change the rate of depreciation relying on relevant clauses of schedule XIV of Companies Act. However reworking of its depreciation for earlier years, and transferring the differential amount from its reserve to its profit and loss account, effectively resulted in a pro-rata increase to its book profits for such earlier years. At this juncture it is apposite to reproduce Explanation (1) (i) to Sec. 115JB (2) of the Act as it stood at the relevant point of time.
ITA No. 1201/2015. :- 7 -:
Explanation 1.— For the purposes of this section, “book profit” means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by— (a…………………….. (b) ………………….. (c) ………………….. (d) ………………….. ( e) ………......... (f) …………………. (g) …………………. (h)…………………… (i)…………………..... If any amount referred to in clauses(a) to (i) is debited to the profit and loss account, and as reduced by,- (i) the amount withdrawn from any reserve or provision (excluding a reserve created before the 1st day of April, 1997 otherwise than by way of a debit to the profit and loss account), if any such amount is credited to the profit and loss account : Provided that where this section is applicable to an assessee in any 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 1st day of April, 1997 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 Explanation below the second proviso to section 115JA, as the case may be’’; (ii)……………. (iii)…………... (iv)……………. (v)……………. (vi)……………. (vii)……………. (viii)…………….
ITA No. 1201/2015. :- 8 -:
Enhanced claim of depreciation on windmills made by the assessee in the earlier years, resulted in decreased profits in such years. If look at it vice-versa, a lower rate of depreciation if applied in the earlier years, would have resulted in enhanced profit and higher transfers to reserves. Therefore, transfer from reserves done by the assessee, through a credit entry in its profit and loss account, for offsetting the effect of enhanced depreciation, was certainly hit by proviso to Explanation1(i) of Section 115JB(2) of the Act. We are therefore of the opinion that ld. Assessing Officer was justified in applying proviso to Explanation 1(i) of Section 115JB(2) of the Act and disallowing the deduction of �5,62,25,123/-, from the profit as per profit and loss account while computing the book profit u/s.115JB of the Act. Orders of the lower authorities on this issue is confirmed.
Coming to the next issue, viz whether provision for FBT is 8. allowable as a deduction to assessee while computing profits for the purpose of Section 115JB of the Act, this in our opinion is squarely covered by CBDT Circular No.8/2005, dated 29.08.2005. In the answer to query No.103, it was stated by CBDT as under:-
Whether FBT would be allowable deduction while computing ‘’book profit’’ under section 115JB? Ans. FBT is a liability qua employer. It is an expenditure laid out or expended wholly and exclusively for the purposes of the business or profession of the employer. However, sub clause (ic) of clause (a) of Section 40 of the Income Tax Act expressly prohibits the deduction of the ITA No. 1201/2015. :- 9 -:
amount of FBT paid, for the purposes of computing the income under the head ‘’profits and gains of business or profession’’. This prohibition does not apply to the computation of ‘’book profit’’ for the purposes of section 115JB. Accordingly, the FBT is an allowable deduction in the computation of ‘’book profit’’ under section 115JB of the Income Tax Act’’. We are of the opinion that FBT was an allowable deduction for computing book profit u/s.115JB of the Act. Orders of the lower authorities on this issue is set aside and ld. Assessing Officer is directed to allow such deduction while computing profits for the purpose of Section 115JB of the Act.
Ground 2 of the assessee stands dismissed whereas its ground No.3 is allowed.
In the result, appeal of the assessee is partly allowed.
Order pronounced on Friday, the 16th day of February, 2018, at Chennai.