Commissioner of Income Tax (Central) – I, New Delhi v. Sain Processing and Weaving Mills (P) Ltd.(Delhi HC)
Facts
The assessee had not debited current year depreciation to the profit and loss account but had disclosed this fact and the quantum of depreciation in the notes appended to the accounts.
Issue
Whether current year depreciation is deductible in computing “book profit” for Minimum Alternate Tax purposes under section 115J of the Income Tax Act, 1961 (“the Act”), although the same was not debited to the profit and loss account, but disclosed in the notes to the account.
Contention of the Revenue
• The provisions dealing with determination of “book profit” indicate the adjustments that are to be made to the net profit as shown in the profit and loss account. Apart from the adjustments so indicated, no other adjustments can be made. In the instant case as depreciation was not debited to the profit and loss account and an adjustment of this nature is not contemplated, no adjustment can be made to the net profit to arrive at the “book profit” for Minimum Alternate Tax.
Contentions of the assessee
• “Book profit”, as defined, means net profit as shown in the profit and loss account for the relevant assessment year which is prepared as per the provisions of Parts II and III of the Schedule VI of the Companies Act, 1956 (“Companies Act”).
• Where depreciation is not charged to profit and loss account, it is obligatory to disclose the same in the notes to accounts (clause 3(iv) of Part II of Schedule VI of Companies Act).
• Notes to accounts form intrinsic part of the profit and loss account and hence, the quantum of depreciation disclosed therein would have to be taken into account in determining the “book profit”.
Observations of Hon’ble Delhi High Court
• It is obligatory under the Companies Act to give information of depreciation which has not been provided for, alongwith the quantum of arrears, by way of notes to accounts.
• Section 211(6) of the Companies Act provides that except where context otherwise requires any reference to a balance sheet or profit and loss account shall include the notes thereon or documents annexed thereto, giving information required to be given and/or allowed to be given in the form of notes or documents.
• The expression used by the legislature is net profit in contra distinction to the well known accounting term cash profit. Accordingly, the net profit of a company cannot be determined till all the items of income and expenses as recognized, as well as, depreciation are taken into account.
Judgment of the Hon’ble High Court
The Hon’ble High Court has held that current year depreciation can be reduced from the net profit to arrive at book profit even though it is not charged to the profit and loss account, but disclosed in the notes appended to the accounts.