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Background
In the recent judgement of Dynamic Orthopedics Pvt.
Ltd.1 the Supreme Court (“SC”) held that once a company falls within the ambit of minimum alternate Tax (“MAT”), it is required to prepare its profit and loss account only in terms of Parts II and III of Schedule VI to the Companies Act, 1956 (“Companies Act”) and it was not open to assessee to apply depreciation rates other than rates specified under Schedule XIV of the Companies Act.
However, in view of its earlier decision in the case of Malayala Manorama Company Ltd.2 , it has referred the case for reconsideration by the larger bench of the SC.
1Dynamic Orthopedics Pvt. Ltd. v. CIT [2010-TIOL-12- SC- IT]
2Malayala Manorama Company Ltd. v. CIT [2008] 300 ITR 251 (SC)
Facts
• The assessee, a private limited company, engaged in the business of manufacture and sale of orthopedic appliances, filed its return of income for the relevant assessment year. In profit and loss account the depreciation was applied at the rates specified under Rule 5 of the Income-tax Rules, 1962 (“the Rules”).
• While completing the assessment of income, the Assessing Officer (“AO”) re-computed the book profit for the purpose of section 115J of the Act, after allowing depreciation as per Schedule XIV to the Companies Act, which was lower than the rates specified under Rule 5 of the Rules.
• On appeal before the Commissioner of Income-tax (Appeals) (“CIT(A)”), it was held that the assessee was right in applying depreciation in its accounts as per Rule 5 of the Rules.
Applicability of the method of depreciation for the purpose of computing book profits under section 115J Tax & Regulatory Services
News Alert*
19 February, 2010
• Aggrieved by the order of CIT(A), the Department filed an appeal before the Income-tax Appellate Tribunal (“the Tribunal”). The Tribunal held that, since the assessee was a private limited company, sections 3493 and 3504 of the Companies Act were not applicable to the case. Therefore, the appeal was dismissed.
• On further appeal before the High Court (“HC”), it was held that section 115J of the Act was introduced in Assessment Year 1988-1989 to take care of the phenomenon of prosperous “zero tax” companies which were paying no income tax though they were making profits and declaring dividends. Consequently, section 115J of the Act was inserted to levy a minimum tax on the book profits of certain companies. According to the HC, section 115J of the Act read with Explanation clause (iv)5 , as it stood at the material time, was a piece of legislation by incorporation and, consequently, the provisions of section 2056 of Companies Act stood incorporated into section 115J of the Act. In consequence, the AO was right in directing the assessee to provide for depreciation at the rate specified in Schedule XIV to Companies Act and not under Rule 5 of the Rules.
Aggrieved by the order of the HC, the assessee made an appeal before the SC.
3Section 349 provides that in computing the net profits of a company in any financial year, the depreciation to the extent specified in section 350 shall be deducted.
4Section 350 provides that the amount of depreciation to be deducted in pursuance of section 349 shall be as shown by the books of the company at the end of the financial year, at the rate specified in Schedule XIV.
5Explanation to clause (iv) of section 115J of the Act provides that the amount of the loss or the amount of depreciation which would be required to be set off against the profit of the relevant previous year as if the provisions of clause (b) of the first proviso to sub-section (1) of section 205 of the Companies Act were applicable, shall be reduced while computing the book profits under section 115J.
6Section 205 of the Companies Act inter alia provides that no dividend shall be declared or paid by a company for any financial year except out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2). The clause (b) of the first proviso to sub-section (1) of section 205 further provides that any loss or depreciation of earlier years (whichever is less) should also be set off against the profits of the year or earlier years as determined in accordance with provisions of sub-section (2). Sub-section 2 inter alia provides that depreciation shall be provided to the extent provided in section 350.
Supreme Court ruling
• Section 115J of the Act is a special provision and does not make a distinction between public and private limited companies.
• In terms of legislation, section 115J of the Act incorporates only provisions of Parts II and III of Schedule VI of the Companies Act. Such incorporation is by a deeming fiction. As a result, section 115J(1A) of the Act needs to be read in the strict sense.
• If a company is liable to pay tax under MAT provisions, then whether it is a private limited company or a public limited company, for the purposes of section 115J of the Act, the company had to prepare its profit and loss account in accordance with Parts II and III of Schedule VI of the Companies Act alone.
• In the case of Malayala Manorama Company Limited7 , it was held that, for the purpose of section 115J of the Act, the depreciation is to be calculated in terms of Schedule XIV to the Companies Act. The SC, while supporting the above Kerala HC judgement, observed that the judgement was wrongly reversed by SC.
• In consequence, the SC has directed to place the civil appeal before the Chief Justice as in their view the matter needs reconsideration by a larger bench of this court.
7CIT v. Malayala Manorama Company Ltd. [2001] 172 CTR 600 (Kerala)
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