Case: Surana Steels Ltd Vs. Deputy Commissioner of Income Tax

2. In order to appreciate the bone of contention it would suffice to state the facts relevant to one of the assessees namely M/s V.V.s (P) Ltd. Hyderabad, a private limited company. The figures of net profit and loss as per the profit and loss account of the company were as follows :y had filed its return of income disclosing `nil income after setting off a part of arrears of depreciation against the current years profit of Rs.. The contention of the assessee was that for the accounting year relevant to the assessment year under consideration, there was no book profit after adjustment of the earlier years loss against the current years profit. Thex Officer, however, computed the book profit under section 115J of the, being 30 per cent. of the current years profit of Rs. 28,37,947/as per the profit and loss account. According to thex Officer, for arriving at the adjusted book profit, unabsorbed depreciation or business loss, whichever is less, is to be adjusted. Since there was no business loss in earlier years as per the books of account, the amount to be set off was considered as `nil, whereas the assessee contended that earlier years loss of Rs. 31,94,136/which in fact was unabsorbed depreciation, was to be deduced from current years profit of Rs. 28,37,947/before arriving at the book profit under section 205(1), first proviso, clause (b) of the Companies Act, 1956x (Appeals) and the Tribunal have upheld the view of thex Officer. On an application made by the assessee, questions of law were framed and referred for the opinion of the High Court. In a few other matters, a special bench was constituted by the Tribunal forming an opinion that there was conflict in decisions of the Tribunal on this issue. The Special Bench of the Tribunal has formed an opinion for the assessee. The High Court has answered the reference made by the Tribunal in favour of the department and against the assessee. In the opinion of the High Court the term `loss as used in Section 205(1), first proviso, clause (b) of the Companies Act, 1956 read with section 115J of thex Act, 1961 does not mean including depreciation. In other words, the High Court has held that the assessee is entitled to deduct depreciation or loss whichever is less only in the eventuality when in a given year there is loss as well as depreciation. In such a case, the lesser of the two amounts will be available for deduction as per the provisions ofx Act. In case there is profit in a year but after adjustment of depreciation it results in loss, no adjustment in the book profit under Section 115J, can be allowed.

Court's reasoning:
Once we have ascertained the object behind the legislation and held that the provisions of Section 205 quoted hereinabove stand bodily lifted and incorporated into the body of Section 115J of thex Act, all that we have to do is to read the provisions plainly and apply rules of interpretation if any ambiguity survives. Section 205(1), proviso clause (b), of the Companies Act brings out the unabsorbed portion of the amount of depreciation already provided for computing the loss for the year. The words the amount provided for depreciation and arrived at in both cases after providing for depreciation make it abundantly clear that in this clause `loss refers to the amount of loss arrived at after taking into account the amount of depreciation provided in the Profit and Loss Account. The significance of the formula prescribed in clause (b) of the proviso to Section 205(1) of the Companies Act can well be demonstrated by two examples as given hereunder :1, Rs. 3 lacs is the depreciation, Rs. 2 lacs is the loss after taking into account the depreciation. The loss being lower than the amount of depreciation, it will be taken into account for set off against the profit of the year in which divided is to be declared. In example2, Rs. 3 lacs is the depreciation. Rs. 4 lacs is the amount of loss after taking into account for set off against the profit of the year for which dividend is to be declared. We are of the opinion that the term `loss as occurring in clause (b) of the proviso to Section 205(1) of the Companies Act has to be understood and read as the amount arrived at after taking into account the depreciation. Then alone the formula prescribed in this clause would make sense and it would be consistent with the object sought to be achieved by enacting Section 115J of the Companies Act, 1961. If `loss were to be taken asn loss then the resultant computation will not be in conformity with the tenor of the provisions of Section 205. The language of clause (b) of the proviso to Section 205(1) is clear. It applies to those cases where the depreciation has been provided in accordance with the provisions ofn (1) of Section 205. The depreciation is provided for in the Profit and Loss Account. The loss is arrived at after taking into account the depreciation provided. It is therefore clear that the word loss as used in proviso clause (b) to Section 205(1) signifies the amount arrived at after taking into account the amount of depreciation and it has to be so read and understood in the context of Section 115J of thex Act, 1961. We do not agree with the view taken by the HIgh Court that in case there is profit in a year but after adjustment of depreciation it results in loss, no adjustment in the book profit under Section 115J can be allowed. The view taken by the High Court would partially defeat the object sought to be achieved by Section 115J of thex Act, 1961. We also do not agree with the High Court saying that having lifted Section 205(1)(b) from the Companies Act into Section 115J of thex Act, there is no occasion to refer to the Companies Act, 1956 at allWe find substance in the submission. There is no reason to assign to the term `loss as occurring in Section 205 proviso clause (b) of the Companies Act a meaning different from the one in which it is understood thereat solely because it is being read along with Section 115J of theOnce we have ascertained the object behind the legislation and held that the provisions of Section 205 quoted hereinabove stand bodily lifted and incorporated into the body of Section 115J of thex Act, all that we have to do is to read the provisions plainly and apply rules of interpretation if any ambiguity survives. Section 205(1), proviso clause (b), of the Companies Act brings out the unabsorbed portion of the amount of depreciation already provided for computing the loss for the year. The words the amount provided for depreciation and arrived at in both cases after providing for depreciation make it abundantly clear that in this clause `loss refers to the amount of loss arrived at after taking into account the amount of depreciation provided in the Profit and Loss Account. The significance of the formula prescribed in clause (b) of the proviso to Section 205(1) of the Companies Act can well be demonstrated by two examples as given hereunder :1, Rs. 3 lacs is the depreciation, Rs. 2 lacs is the loss after taking into account the depreciation. The loss being lower than the amount of depreciation, it will be taken into account for set off against the profit of the year in which divided is to be declared. In example2, Rs. 3 lacs is the depreciation. Rs. 4 lacs is the amount of loss after taking into account for set off against the profit of the year for which dividend is to be declared. We are of the opinion that the term `loss as occurring in clause (b) of the proviso to Section 205(1) of the Companies Act has to be understood and read as the amount arrived at after taking into account the depreciation. Then alone the formula prescribed in this clause would make sense and it would be consistent with the object sought to be achieved by enacting Section 115J of the Companies Act, 1961. If `loss were to be taken asn loss then the resultant computation will not be in conformity with the tenor of the provisions of Section 205. The language of clause (b) of the proviso to Section 205(1) is clear. It applies to those cases where the depreciation has been provided in accordance with the provisions ofn (1) of Section 205. The depreciation is provided for in the Profit and Loss Account. The loss is arrived at after taking into account the depreciation provided. It is therefore clear that the word loss as used in proviso clause (b) to Section 205(1) signifies the amount arrived at after taking into account the amount of depreciation and it has to be so read and understood in the context of Section 115J of thex Act, 1961. We do not agree with the view taken by the HIgh Court that in case there is profit in a year but after adjustment of depreciation it results in loss, no adjustment in the book profit under Section 115J can be allowed. The view taken by the High Court would partially defeat the object sought to be achieved by Section 115J of thex Act, 1961. We also do not agree with the High Court saying that having lifted Section 205(1)(b) from the Companies Act into Section 115J of thex Act, there is no occasion to refer to the Companies Act, 1956 at