Commissioner Of Income Tax vs Appollo Tyres Ltd.

G. Sivarajan, J.: Both these cases arise from a common order of the Tribunal, Cochin Bench, in ITA No. 301/Coch/1991. The assessment year concerned is 1988-89. The relevant accounting period ended, 31st Oct., 1987. The assessee sought reference of as many as 12 questions under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') for opinion of this Court. The Tribunal forwarded a statement of case dt. 30th Nov., 1993 and referred the following questions for opinion of this Court :

"1. Whether, on the facts and in the circumstances of the case, the assessee-company's determination, as accepted by the Tribunal, of net profit after providing for the arrears of depreciation in the P&L a/c of the company for the relevant accounting year was in accordance with Parts II and III of Sch. VI of the Companies Act, 1956 as required under section 115J of the Income Tax Act, 1961?

(i) Whether, on the facts and in the circumstances of the case, is it mandatory on the part of the company, to provide for the arrears of depreciation (in respect of additional shifts in view of Sch. XIV to the Companies Act coming into force with effect from 2nd April, 1987, if it was not originally provided in the earlier years?

2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that

(i) the entire business of the assessee- company including the earning of dividend income is eligible business within the meaning of sub-section (2) of s. 32AB of the Income Tax Act, 1961?

(ii) The dividend income amounting to Rs. 1,51,89,760 should be included in computing the profit of the eligible business under sub-section (3) of s. 32AB of the Income Tax Act?

3. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that-

(i) in computing 20 per cent of the eligible profit, the income from Unit Trust of India (dividends and profit or loss on the sale of units) should also be considered along with other income;

(ii) two activities of the assessee have to be considered as forming part of the same business .....

(iii) As both the activities constituted the same business, which is an eligible business, provisions of s. 32AB(3)(b) is not applicable?"

This is the subject-matter of IT Ref. No. 70 of 1994. Since the Tribunal did not refer all the 12 questions sought to be referred by the assessee, it filed OP No. 2487 of 1994 seeking reference of the remaining questions also. This Court by judgment dt. 7th Nov., 1994 directed reference of the following questions also for the opinion of this Court:

"(1) Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the expenditure incurred for the wife of the chairman-cum-managing Director of the company for foreign travel is an allowable deduction?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee's business in the purchase and sale of units and its business in the manufacture and sale of tyres constituted one and the same business?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the buying and selling of units is not a speculation .,business and that the loss of Rs. 22,69,700 was allowable as a business loss and that it cannot be treated as a speculation loss?"

It was observed in the said judgment that the Tribunal has already made reference of question Nos. 1, 3 to 6, 8 and 9(a) and also observed that question Nos. 2, 10 and 12 need not be referred as they are merely argumentative. The questions directed to be referred in OP No. 2487 of 1994 are the subject matter of the reference in IT Ref. No. 43 of 1997.

2. In IT Ref. No. 70 of 1994 there is an important question regarding the scope of the Explanation to s. 115J of the Income Tax Act, 1961 particularly the expressions 1 prepared in accordance with the provisions of Parts II and Ill of the Sixth Schedule to the Companies Act, 1956' and cl. (iii) of the said Explanation as it stood at the relevant period for arriving at the 'book profit' for the purposes of s. 115J.

3. The matter arises this way. The assessee is a public limited company. It is engaged in the business of manufacture and sale of tyres and tubes. For the assessment year 1988-89, assessee filed its return of income on 29th June, 1988. The assessee computed the book profits for the purpose of s. 115J of the Act at Rs. 69,94,983 and 30 per cent of the above was shown at Rs. 20,98,495. For arriving at the said figure, the assessee had shown net profit as per the P & L a/c at Rs. 69,91,306 to which it added provision for income Rs. 16,00,000 and deducted two sums of Rs. 15,44,122 and Rs. 52,201 representing the amount transferred from capital reserve adjusted against depreciation and interest on post office savings bank account exempt under section 10(15)(1) and Chapter III respectively. The assessing authority noted that the assessee, in arriving at the net profit of Rs. 69,91,306, made a deduction of Rs. 13,66,39,051 by way of arrears of depreciation. The deduction of Rs. 13,66,39,051 representing the arrears of depreciation, according to the assessing authority, was not in accordance with the provisions of Part II and Part III of the Sixth Schedule to the Companies Act, 1956. According to the assessing authority, this deduction is not permissible either under Part II or under Part III of the Sixth Schedule to the Companies Act or under section 115J of the Act. The assessing authority has also noted that the assessee itself did not consider that the arrears of depreciation is deductible in the P&L a/c for arriving at the net profit, as is seen from the figures contained in the directors' report to the shareholders. He noted that in the said report arrears of depreciation amounting to Rs. 13,66,39,051 was shown only by way of an adjustment below the line of net profit. The assessing authority accordingly concluded that the net profit as per accounts should be taken at Rs. 14,36,30,357. The assessing authority made further adjustments to the same as contemplated in the Explanation to s. 115J of the Act. Thus, he added a sum of Rs. 16,00,000 being provision for income-tax and deducted Rs. 15,44,122 and Rs. 52,201 as mentioned earlier and arrived at the 'book profit' at Rs. 14,36,34,034 and 30 per cent of the above was fixed at Rs. 4,30,90,210.

4. Being aggrieved by the computation made by the assessing authority, the assessee took up the matter in appeal before the Commissioner (Appeals), Kochi. The appellate authority confirmed the computation of book profit arrived at by the assessing authority. Thereafter, he considered the question as to whether the Explanation to s. 115J will make any difference in the book profit for the purpose of tax computation under section 115J. For the said purpose, he referred to the provisions of cl. (iii) of the Explanation which contemplates reduction of 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 cl. (b) of the first proviso to sub-section (1) of s. 205 of the Companies Act, 1956 are applicable.

5. Referring to cl. (b) of the proviso to s. 205(1), the first appellate authority observed that by virtue of cl. (iii) of Explanation to s. 115J, the extent of loss incurred by the company in the past or the amount of depreciation provided for that year or those years whichever is less has to be adjusted. He further observed that the assessing authority had fixed an amount of Rs. 14,36,34,034 without considering the provisions of cl. (iii) of the Explanation to s. 115J and directed the assessing authority to set off the business loss or depreciation whichever is less in accordance with the provisions of s. 205(1)(b) of the Companies Act for arriving at the book profit. He also directed that this amount has to be ascertained from the P&L ale of the company from the very beginning and lesser amount of loss or depreciation has to be deducted from the gross amount,

6. The assessee not being satisfied with the above, filed further appeal before the Tribunal, Cochin Bench. The Tribunal accepted the contentions of the assessee that for arriving at the net profit for the purpose of s. 115J prior year's depreciation has necessarily to be deducted from the current year's profits, as otherwise, the P&L ale will not reflect the true financial position of the company. The Tribunal accordingly held that the assessee was perfectly justified in deducting the sum of Rs. 13,66,39,051 from the current year's profit. The Tribunal further held that in a case where net profit is arrived at in the P&L ale after deducting the prior year's depreciation, there is no question of further adjusting the amount provided in cl. (iii) of Explanation to s. 115J of the Act. The various findings rendered by the Tribunal in support of its conclusion are as follows:

(1) By the introduction of Sch. XIV (effective from 2nd April, 1987) in the Companies Act, 1956 providing for separate depreciation rates for single shift, double shift and tripple shift working, the assessee's previous year having ended after the introduction of Sch. XIV, for the first time, an unambiguous and clear liability was cast on the assessee to work out the depreciation on the basis of the said Schedule for the year in question.

(2) The companies which are desirous of paying dividend for any financial year out of its profit have necessarily to provide for arrears of depreciation as well as the depreciation for the financial year concerned under cl. (a) of the first proviso to s. 205(1) of the Companies Act and this is a mandatory requirement of the company.

(3) See. 350 of the Companies Act prescribes only the mode of calculation of depreciation on the written down value method for purpose of ascertaining the managerial remuneration under section 349(4)(k) of the Companies Act while the obligation to provide for depreciation in the accounts arises only under section 205 and not under section 350. See. 205, besides creating a charge of depreciation, also provides for alternative methods of depreciation and one such method is found in s. 350 of the Companies Act. In other words, s. 205 is a charging section and s. 350 is a machinery section as regards depreciation.

(4) In the light of para 3(iv) of Part II and para 7 of Part III of Sch.VI which contains a definition of 'provision', it is to be inferred that the P&L ale must disclose the provision for depreciation on its fixed assets. If provision for depreciation was not made, the arrears of depreciation in terms of s. 205(2) should also be quantified in addition and highlighted by way of a separate note. In other words, the intention of the legislature as evident in para 3(iv) is to look upon arrears of depreciation as part of current depreciation.

(5) Even assuming that the arrears of depreciation are not part of current depreciation, the charging of arrears of depreciation in the P&L a/c in the current year is a necessary requirement in assessing its impact on the current profits. A.S. 5 issued by the ICAI in November, 1982 also provides that prior period items representing as material charges or credits which arise in the current period should be reflected in the P&L a/c of the current year. Non-charging of depreciation in the earlier years can, at the worst, be viewed as error or omission, and the same could be charged on a provision being made thereof in the P&L a/c of the current year. The only condition is that the fact must be disclosed or highlighted in the accounts. When the Revenue emphasised sub-cl. (a) of para 7(2) of Part III they overlooked sub-cl. (b) of the same para which is wider in its import and inclusive in content. The prior period expenses or income would fall under sub-cl. (b) as material features affecting the accounts. A cumulative reading of sub-cls. (a) and (b) of para 7(2) of Part M will show that arrears of depreciation, even if it is considered as a prior period expenditure, will have its natural accommodation in the P&L a/c of the current year.

(6) Arrears of depreciation even if it is only an appropriation and not a charge on the profit of the current year, still the same cannot be added back to enhance the book profit under section 115J. The Explanation to s. 115J deals with certain specific adjustments, which are specified therein. Some of them clearly relate to the income or expenditure of the current year which win be found debited or credited in the P&L a/c. Clause (iii) (later renumbered as cl. (iv) dealing with past losses or past depreciation will not figure anywhere in the P&L a/c of the current year. Though cls. (a) to (e) and cl. (i) provide for adjustment, there is no mention anywhere for adjustment of prior period expenses such as arrears of depreciation whether it is looked upon as a charge against the profit or as an appropriation of profit.

(7) The legislature must be credited with the knowledge of several items that appear in the P&L a/c including the appropriations found therein and, therefore, any item which is not earmarked for adjustment in the Explanation cannot be brought within the mischief of the Explanation to s. 115J. In other words, the assessing authority has no jurisdiction to make additions or subtractions as he likes contrary to what is specifically provided for in s. 115J.

(8) The assessing authority had taken the view that neither in terms of Parts II and III of Sch. VI nor under the Act, arrears of depreciation not provided for in the earlier years could be charged against the profit of the current year drawing support from the directors' report on the relevant annual accounts placed before the shareholders at the annual general meeting wherein the arrears of depreciation has been shown as an adjustment below the line of net profit and accordingly held that the book profit should be taken as that shown above the line, i.e., before the debit of the said arrear depreciation. This approach was not a valid one. The financial results given in the directors' report was an abridged version of the detailed P&L a/c and, therefore, no adverse inference could be drawn therefrom.

7. The aforesaid findings of the Tribunal are questioned by the Revenue in IT Ref. No. 70 of 1994. Shri P.K.R. Menon, learned counsel appearing for the Revenue, contended before us that the Tribunal was not justified in holding that the net profit has to be arrived at after adjusting the prior year's depreciation and that cl. (iii) of Explanation to s. 115J has no relevance in a case where net profit has been arrived at after deducting the prior year's depreciation not provided for in the earlier year's P&L a/c. Learned counsel also submitted that s. 115J incorporates only the provisions of Parts 1 and II of the Sixth Schedule of the Companies Act for the preparation of the P&L a/c and also the provisions of cl. (b) of the proviso to sub-section (1) of s. 205 of the Companies Act.

According to the learned counsel, these are the only two provisions of the Companies Act which are relevant to be considered in the application of s. 115J of the Act. According to him, this is a case of legislation by incorporation and once certain provisions of the Companies Act are incorporated in s. 115J of the Income Tax Act for the purpose of the assessment under the Act, the other provisions of the Companies Act have no application and that the provisions of the Companies Act cannot be looked into for the application of s. 115J of the Act thereafter. According to him, this is a case of legislation by incorporation and, therefore, any subsequent amendments made to the incorporated provisions in the Companies Act have no application in the matter of assessment under section 115J of the Act. Thereafter, the provisions of s. 115J have to be interpreted consistent with the other provisions of the Income Tax Act. On the basis of the above, learned counsel further submitted that the amendments made to ss. 205(2) and 350 of the Act by the Companies Amendment Act, 1988 and the provisions of Sch. XIV inserted by the said Amendment Act with retrospective effect from 2nd April, 1987 also have no application to the assessment in question. Learned senior counsel also submitted that the expressions 'the loss' and 'set off' used in cl. (iii) of the Explanation to s. 115J are significant. He also submitted that the expression 'provided' in cl. (b) of the proviso to s. 205(1) of the Companies Act also is significant. He submitted that under the provisions of the proviso to cl. (b) of s. 205(1) of the Act only the amount already provided can be adjusted from the net profit. According to him, the use of the expression 'set off' also cannotes only the current year's loss/depreciation and, therefore, carried forward or unabsorbed loss/depreciation cannot be adjusted by resort to cl. (iii) of the Explanation. The counsel, in that context, referred to and relied on the observations of Kanga in "The Law and Practice of Income-tax, (1959) Vol. I at p. 351 dealing with the provisions of s. 10(2)(vi) of the Income Tax Act, 1922 and the provisions of ss. 70 and 72 of the 1961 Act and submitted that the current year's liability alone can be considered. Counsel further relied on the decision of the Andhra Pradesh High Court in V.V. Trans-Investments (P) Ltd. vs. CIT (1994) 119 CTR (AP) 184 : (1994) 207 ITR 508 (AP). He submitted that the Tribunal failed to consider the importance of the non obstante clause in sub-section (1) of s. 115J of the Act as also the significance of legislation by incorporation used in the Explanation to the said sub-section. He also submitted that the Tribunal did not bear in mind the background and circumstances of introduction of the special provisions regarding computation of total income chargeable to tax in respect of certain companies. It is contended that the Tribunal has erroneously assumed that the provisions of the Companies Act other than what is incorporated in the Explanation are also applicable for the fixation of the 'book profit' for the purposes of s. 115J. The sum and substance of the argument of the learned counsel for the Revenue is that in arriving at the net profit the assessee cannot deduct the prior year's depreciation not provided for in the earlier year's P&L a/c and that the same cannot be allowed to be adjusted in arriving at the book profit. Learned counsel canvassed for acceptance the computation of net profit/book profit made by the assessing authority and affirmed by the first appellate authority.

8. Shri Sarangan, learned counsel appearing for the assessee, on the other hand, sought to support the order of the Tribunal holding that the assessee is entitled to adjust the amount of depreciation not provided for in the P&L a/c of the earlier years since the assessee is entitled to compute the depreciation for the earlier years taking into account the extra-shift allowance also particularly in view of the amendment to the Companies Act in 1988 inserting Schedule XIV effective from 2nd April, 1987 which falls during the accounting period relevant to the assessment year in question. Learned counsel supported the findings of the Tribunal to the above effect by relying on the clarifications issued by the Company Law Board at various circles, the opinion expressed by the Institute of Chartered Accountants of India and other commentaries of Company Law and the Income Tax Act. Learned counsel also submitted that the concept of depreciation is for the purpose of providing for the wear and tear effected to the plant and machinery invested by the assessee and that if that is the intention behind providing for depreciation, if an assessee has used the machine in addition to the normal use by way of extra-shifts single-shift, double shift and triple shift-the wear and tear of the plant and machinery is more and a prudent company would provide for such depreciation taking into account the constant use of the plant and machinery, as otherwise at any particular point of time, the asset of the company could not be reflected truly and correctly. Learned counsel submitted that the assessee was entitled under the provisions of s. 205(2)(b) of the Companies Act to provide for depreciation over and above the normal depreciation by taking into account the extra-shift allowance also, that it has been so clarified by the Company Law Board in its various circulars and that the assessee did not and could not provide for such depreciation only because of the legal opinion to the effect that in a case where an assessee claims depreciation by following the straight-line method it is not entitled to provide any additional depreciation taking into account the extra-shift allowance. It is also pointed out that the company in the P&L a/c for the earlier years has specifically said so in the P&L a/c itself. It is also pointed out that the assessee- company in the assessment year in question has provided for such amounts lumping up unprovided for depreciation for all the earlier years as provided for in cl. (b) of the first proviso to s. 205(10) of the Companies Act and that the assessee- company was perfectly justified in doing so. Learned counsel drew support for the above from Schedule XIV of the Companies Act inserted on 24th May, 1988 with effect from 2nd April, 1987 by the Company Laws Amendments Act, 1988. Schedule XIV of the Companies Act for the first time provides for the rate of depreciation. It can be seen from Schedule XIV, which has reference to ss. 205 and 350 of the said Act, that different rates of depreciation are provided for single shift, double shift and triple shift depending on the nature of the assets. Under single shift, it provides for written down value method as well as the straight line method. For double shift and triple shift also the same method is provided. According to the learned counsel for the assessee, there was no taboo for claiming depreciation for single shift, double shift and triple shift in addition to the straight line method. According to him, the view taken by the assessee- company that it is entitled to claim depreciation on extra shift allowance in addition to the straight line method was supported by the Bill, that this Schedule is given effect to with retrospective effect from 2nd April, 1987 and, therefore, even the Schedule applied to the accounting period relevant to the assessment year in question and that even assuming that the Schedule is not applicable, the assessee was perfectly justified in providing for depreciation taking into account the extra shift made by the assessee in the earlier years. It is submitted that the assessee has not adopted the rates provided in Schedule XIV, but had only found support of the view taken by it from the said Schedule. Learned counsel also submitted that the accounting principle is very relevant in this matter. He relied on the decision of the Supreme Court in Challapalli Sugars Ltd. vs. CIT 1974 CTR (SC) 309 : (1975) 98 ITR 167 (SC) , in support. of the same. Relying on the said decision he submitted that the accounting principle made have to be applied in the matter of preparation of P&L a/c and if those accounting principles and the practice followed are also taken into consideration, prior period expenses have also to be added to the current year's liability and the net profit to be arrived at is current year's profit minus the prior period expenses/liability. Learned counsel also submitted that if the net profit has to be arrived at after adjusting the prior period depreciation, then there is no question of application of cl. (iii) of the Explanation to s. 115J. Learned counsel also submitted that, if for any reason, for arriving at the net profit as per the P&L a/c, prior period depreciation cannot be adjusted, then necessarily ,the adjustment contemplated under cl. (iii) of Explanation to s. 115J has to be made. It is submitted that in the view taken by the Tribunal in this case the Tribunal did not have occasion to consider the application of cl. (iii) of the Explanation to s. 115J. He submitted that this Court has to interpret the scope and ambit of cl. (iii) of the Explanation to s. 115J and the matter has to be remanded to the Tribunal for considering the question of adjustment in the light of the interpretation so placed by this Court. Regarding the scope of cl. (iii) of Explanation to s. 115J the counsel submitted that the expression 'the loss' referred to therein takes in unabsorbed depreciation also and in that view of the matter arrears of depreciation computed for the earlier years taking into account extra-shift allowance also is liable to be deducted from the net profit in the P&L a/c. Learned counsel also submitted that reference to the provisions of Part 11 and Part M of the Sixth Schedule to the Companies Act, 1956 and cl. (b) of the first proviso to s. 205(1) of the said Act in the Explanation can be considered only as a legislation by reference and, therefore, all the provisions of the Companies Act are applicable for understanding the said provisions. He further submitted that the expression 'loss' used in cl. (iii) must be understood in the context of the provisions of the Companies Act and not under the provisions of the Income Tax Act. He further submitted that the decision of the Andhra Pradesh High Court in V.V. Trans-Investments Pvt. Ltd. vs. CIT (supra) is distinguishable. The reasons stated are that (1) in the decided case there was no provision for arrears of depreciation in the P&L a/c and, (2) the question of what is 'net profit' was not in issue in that case.

9. In order to appreciate the merits of the rival submissions made by the counsel appearing on either side, it is necessary to refer to the provisions of s. 115J of the Act, the relevant provisions of the Companies Act and the background for introduction of this special provision in the Act. Sec. 115J of the Act as it stood at the relevant time reads as follows:

"115J. Special provisions relating to certain companies(1) Notwithstanding anything contained in any other provision of this Act, where, in the case of an assessee being a company, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1988 (hereinafter in this section referred to as the relevant previous year), is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit.

Explanation.-For the purposes of this section, "book profit" means the net Explanation.-For the purposes of this section, "book profit" means the net profit as shown in the P&L a/c for the relevant previous year prepared in accordance with the provisions of Parts II and III of the Sixth Schedule to the Companies Act (1 of 1956), as increased by-

(a) the amount of income-tax paid or payable, and the provision therefor; or

(b) the amounts carried to any reserves, by whatever name called; or

(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or

(d) the amount by way of provision for losses of subsidiary companies., or

(e) the amount or amounts of dividends paid or proposed; or

(f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies, if any such amount is debited to the P&L a/c, and as reduced by,-

(i) the amount withdrawn from reserves or provisions, if any, such amount is credited to the P&L a/c; or

(ii) the amount of income to which any of the provisions of Chapter III applies, if any such amounts is credited to the P&L a/c; or

(iii) 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 cl. (b) of the first proviso to sub-section (1) of s. 205 of the Companies Act, 1956 (1 of 1956), are applicable.

(2) Nothing contained in sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of sub-section (2) of s. 32 or sub-section (3) of s. 32A or cl. (ii) of sub-section (1) of s. 72 or s. 73 or s. 74 or sub-section (3) of s. 74A or sub-section (3) of S. 80J ',

10. Before proceeding to consider the scope and ambit of s. 115J of the Act, it is necessary at this stage to 'examine' the background of the said provision. Before the introduction of s. 115J, the position was that the income chargeable to tax under the head 'profits and gains of business or profession' shall be computed in accordance with the provisions contained in ss. 30 to 43C. This was the position with respect to every person who is subjected to be charged under section 4 of the Act. The legislature, by the Finance Act, 1983, introduced a new chapter-Chapter VI-B containing only one provision s. 80WA-imposing restriction on certain deductions in the case of companies, with effect from 1st April, 1984. Later, by the Finance Act, 1987, the said chapter was deleted with effect from 1st April, 1988. Simultaneously in the Finance Act, 1987, itself a new chapter-Chapter XII-B-containing only one section-Sec. 115J-was inserted. So, as on the date of introduction of s. 115J, i.e., from 1st April, 1988 (ignoring s. 80WA) a company, which carries on business falling under section 28, is bound to compute its total income in accordance with the provisions of ss. 30 to 43C of the Act and it is liable to pay tax under the Act only on the total income computed thus. If the provisions of s. 80VVA are applied, where the aggregate of the amount of deductions mentioned under sub-section (2) of the said section exceeds seventy per cent of the pre-incentive total income, i.e., the amount before deduction of the amounts mentioned in sub-section (2) thereof, the aggregate of the amount to be allowed as deduction shall be restricted to seventy per cent of the pre-incentive total income. Now, we will consider the effect of or the scope of s. 115J. Sub-section (1) of the said section opens with the non obstante clause-Notwithstanding anything contained in any other provisions of this Act. It proceeds to say that in the case of an assessee being a company, where the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1988, is less than thirty per cent of its book profit, then the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit. Thus, the provisions of sub-section (1) of s. 115J requires the computation of total income of an assessee, being a company, in accordance with the provisions relating to the assessment of income chargeable to tax under the head 'income from business'. It also requires the assessee, being a company, to make a computation of its total income based on its book profit. The computation of the latter figure of total income being thirty per cent of its book profit, the company is obliged to compute its book profit. The mode of computation of 'book profit' is provided in the Explanation to the said sub-section. As already stated, the application of s. 115J of the Act arises only in a case where the total income as computed in accordance with the normal provisions of the Act, in the case of a company, exceeds thirty per cent of its book profit. In other words, if, on a computation of the total income computed under the normal provisions of the Act with the book profit arrived at as per the Explanation, the total income as computed is less than thirty per cent of the book profit, then s. 115J is attracted and the total income of the company shall be deemed to be thirty per cent of the book profit. In the instant case, there i:-, no dispute with regard to the application of s. 115J of the Act, for, even as per the computation made by the assessee, the total income computed in accordance with the normal provisions of the Act is less than thirty per cent of its book profit as computed by the assessee. The only dispute in this case is regarding the amount of book profit. As already stated, the Explanation to sub-section (1) defines what 'book profit' is. It means the net profit as shown in the P&L a/c for the relevant previous year prepared in accordance with the provisions of Parts II and III of the Sixth Schedule to the Companies Act (l/56) with the adjustments provided in cls. (a) to (f) and (i) to (iii) of the Explanation. Amounts mentioned in cls. (a) to (f) have to be added to the net profit arrived at as above if the said amounts had been debited in the P&L a/c and the amounts mentioned in cls. (i) to (iii) shall be debited from the net profit if the said amounts are credited to the P&L a/c. Clause (iii) also provides for deduction of the amount mentioned therein, which does not mention anything about debit or credit in the P&L a/c. In spite of the definition of 'book profit' contained in the Explanation, dispute has arisen about the ascertainment of book profit. As already noticed, the Explanation contemplates two steps. The first step deals with the preparation of the P&L a/c in accordance with the provisions of Parts II and III of the Sixth Schedule to the Companies Act for arriving at the net profit. The second step deals with the adjustments contemplated in cls. (a) to (f) and (i) to (iii) of the Explanation from the net profit as arrived at above. The dispute, as already stated, is regarding the debit of a sum of Rs. 13,66,39,051 representing arrears of depreciation in the P&L a/c of the assessee- company for the assessment year in question. According to the assessee, it is bound to make provision for arrear depreciation in the P&L a/c for the previous year prepared in accordance with the provisions of Parts H and III of the Sixth Schedule to the Companies Act. But, according to the department, it is not contemplated. Thus, it can be seen that the first step is the preparation of the P&L a/c for arriving at the net profit. The Explanation itself contemplates the preparation of the P&L a/c for arriving at the net profit in accordance with the provisions of Parts 11 and III of the Sixth Schedule to the Companies Act. Thus, it is necessary to see as to whether the debit of arrear depreciation is contemplated under the abovementioned provisions. Parts II and III of the Sixth Schedule to the Companies Act, 1956, relevant portion thereof reads as follows:

"PART IIREQUIREMENTS AS TO P&L A/C.

1. The provisions of this Part shall apply to the income and expenditure account referred to in sub-section (2) of s. 210 of the Act, in like manner as they apply to a P&L a/c, but subject to the modification of references as specified in that subsection.

2. The profit and loss account

(a) shall be so made out as clearly to disclose the result of the working of the company during the period covered by the account.' and

(b) shall disclose every material feature, including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of an exceptional nature.

3. The P&L a/c shall set out the various items relating to the income and expenditure of the company arranged under the most convenient heads; and in particular, shall disclose the following information in respect of the period covered by the account ***** ***** ******

(iv) The amount provided for depreciation, renewals or diminution in value of fixed assets.

If such provision is not made by means of a depreciation charge, the method adopted for making such provision.

If no provision is made for depreciation, the fact that no provision has been made shall be stated and the quantum of arrears of depreciation computed in accordance with s. 205(2) of the Act shall be disclosed by way of a note.

***** ***** ****** 4A. The P&L a/c shall contain or give by way of a note a statement showing the computation of net profits in accordance with s. 349 of the Act with relevant details of the calculation of the commissions payable by way of percentage of such profits to the directors (including managing directors) or manager, (if any).

****** ****** ******

6. (1) Except in the case of the first P&L a/c laid before the company after the commencement of the Act, the corresponding amounts for the immediately preceding financial year for all items shown in the profit and loss account shall also be given in the profit and loss account.

PART III-INTERPRETATION

7. (1) For the purposes of Parts I and H of this Schedule, unless the context otherwise requires,-

the expression "provision" shall, subject to sub-cl. (2) of this clause, mean any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy., ****** ******** ******* and in this sub-clause the expression "Iiability" shall include all liabilities in respect of expenditure contracted for and all disputed or contingent liabilities.

(2) Where

(a) any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, not being an amount written off in relation to fixed assets before the commencement of this Act; or

(b) any amount retained by way of providing for any known liability; is in excess of the amount which in the opinion of the directors is reasonably necessary for the purpose, the excess shall be treated for the purposes of this Schedule as a reserve and not as a provision".

11. Under s. 210(1) of the Companies Act, 1956, there is an obligation on the board of directors of a company to lay before the company at its general body meeting a balance sheet and a P&L a/c. Sec. 211, sub-section (1) thereof provides that every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and subject to the provisions of the said section, shall be in the form set out in Part I of Schedule VI or in such other form as may be approved by the Central Government. It also provides that due regard shall be had, as far as may be, to the general instructions for preparation of balance sheet under the heading "Notes" at the end of that part. So far as P&L a/c of a company also, sub-section (2) of the said section provides that it shall give a true and fair view of the profit or loss of the company for the financial year and shall, subject as aforesaid, comply with the requirements of Part II of Schedule VI so far as they are applicable thereto. Sub-section (5) of the said section, inter alia, provides that the P&L a/c of a company shall not be treated as not disclosing a true and fair view of the state of affairs of the company, merely by reason of the fact that they do not disclose any matters which are not required to be disclosed by virtue of the provisions contained in Schedule VI or by virtue of a notification issued under sub-section (3) or an order issued under sub-section (4).

12. Now coming to Part II of the Sixth Schedule, cl. (2) provides that the P&L a/c shall be so made out as clearly to disclose the result of the working of the company during the period covered by the account and it shall also disclose every material feature regarding income and expenditure debited or credited. Clause 3 provides that the P&L a/c shall set out the various items relating to the income and the expenditure of the company arranged under the most convenient heads and in particular, shall disclose the information in respect of the period covered by the account. One such information relevant for the purpose of this case is provided in sub-cl. (iv) thereof. It is regarding the amount provided for depreciation, renewals or diminution in value of fixed assets. It further provides for disclosure of information regarding the method adopted for making such provision in case such provision is not made by means of a depreciation charge and further provides that if no provision is made for depreciation, the fact that no provision has been made shall be stated and the quantum of arrears of depreciation computed in accordance with s. 205(2) shall be disclosed by way of a note. Clause 4-A provides that the P&L a/c shall contain or give by way of a note a statement showing the computation of net profits in accordance with s. 349 of the Companies Act with relevant details of the calculation of the commissions payable by way of percentage of such profits to the directors. Clause 6(1) provides that except in the case of the first P&L a/c laid before the company after the commencement of the Act, the corresponding amounts for the immediately preceding financial year for all items shown in the P&L a/c shall also be given in the P&L a/c. Clause 7(1)(a) contained in Part III provides that the expression "provision" shall, subject to sub-cl. (2) of cl. 7, mean any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, etc. Since cl. 3(iv) provides for disclosure, by way of a note, of the quantum of arrears of depreciation computed in accordance with s. 205(2) of the Companies Act in a case where no provision is made for depreciation, it is necessary to refer to the said provision also. Sec. 205 deals with dividend to be paid out of profits. Sub-section (1) of s. 205 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). For that purpose, sub-section (2) provides for the mode of ascertainment of the depreciation. As per cl. (a) of sub-section (2), the amount of depreciation shall be to the extent specified in s. 350. Clause (b) provides for an alternate mode of computation. Clause (c) also provides for any other mode approved by the Central Government. It has to be noted that the different modes provided under sub-section (2) are optional and it is for the assessee to choose either the one or the other. If the assessee chooses to opt for the mode provided under cl. (a), then the ascertainment of amount of depreciation is as provided in s. 350. Sec. 350, it must be noted, provides that the amount of depreciation to be deducted in pursuance of cl. (k) of sub-section (4) of s. 349 shall be the amount calculated with reference to the written down value of the assets as shown in the books of the company at the end of the financial year at the commencement of this Act or immediately thereafter and at the end of each such financial year. So, in respect of an assessee who has opted for the mode of computation provided under cl. (a) of sub-section (2), the amount of depreciation has to be calculated with reference to the written down value of the assets. In this context, it has also to be noted that prior to the amendment of the Companies Act made in 1988 whereby Sch. XIV was inserted and consequent amendment was made to s. 350 to the effect that 'at the rate specified in Sch. XW the amount of depreciation for the purpose of s. 350 had to be computed in accordance with the provisions of the Income Tax Act and the Rules issued thereunder. Since cl. 4-A of Part II of the Sixth Schedule and s. 350 of the Companies Act also refer to s. 349(4)(k) of the Act which, in turn, refers to s. 348 also, it will be profitable to refer to the two sections also. Sec. 348 is a provision for remuneration of managing agents of a company. Sub-section (1) of s. 348 says that a company shall not pay to its managing agent in respect of any financial year beginning at or after the commencement of this Act, by way of remuneration whether in respect of his services as managing agent or in any other capacity any sum in excess of ten per cent of the net profits of the company for that financial year. Here, we find reference to the expressions "net profits" and the remuneration of the managing agent is geared to a percentage of the net profit. Sec. 349 provides for determination of net profits for the purpose of s. 348 where sub-section (4)(k) provides that in making the computation of net profit, depreciation to the extent specified in s. 350 shall be deducted. In this background, we will go back to the provisions of Part II of the Sixth Schedule to the Companies Act to understand as to what are all the components of the P&L a/c for arriving at the net profit contemplated in the Explanation to s. 115J of the Act. Clause 2 of Part II only provides that the P&L a/c shall be so made out as clearly to disclose the result of the working of the company during the period covered by the account and to disclose every material feature regarding credits or receipts and debits or expenses. Clause 3(iv) provides for the disclosure of the information regarding the amount provided for depreciation. From the further provisions of cl. 3(iv) it would appear that the provision for depreciation need not be made a charge against the profit of that year. What is required is to make a note of the method adopted for making the provision, if any such provision is made and in a case where no provision is made for depreciation, to state the said fact and to work out the quantum of arrears of depreciation in accordance with s. 205(2) of the Companies Act and to disclose it by way of a note. A cumulative reading of the aforesaid provisions of Part II would show that it is not at all necessary, even if a provision for depreciation is made in the P&L a/c to make depreciation a charge against the profits of that year. It would further show that it is not obligatory that a provision is made for depreciation. What is required is only to show the method adopted for making the provision for depreciation and in a case where no provision is made, to state so and to show the quantum of arrears of depreciation computed in accordance with s. 205(2) of the said Act by way of a note. Though Part II of the Sixth Schedule deals with the preparation of the P&L a/c, we are more concerned with the net profit as per the P&L a/c prepared in accordance with Part II. In other words, we are more concerned with the items which can be legitimately made a charge against the profits in the P&L a/c. We have already pointed out that under cl. 2 of Part II, it is the result of the working of the company during the period covered by the account that is material. In that context, cl. 3(iv), which refers to 'the amount provided for depreciation', can only mean the amount of that year's depreciation, i.e., current depreciation. This will be further clear from the provisions of s. 205(2) r/w s. 350 and consequently from ss. 348 and 349 of the Companies Act. Sec. 205(2), as already stated, provides for the various modes for ascertainment of depreciation. Whatever mode provided therein is adopted, it is only the amount calculated under the said mode that can be shown as a provision for the purposes of determining the profit of that year. This is further clear from the provisions of s. 348 r/w s. 349(4)(k) of the Companies Act. As pointed out earlier, s. 348 refers to net profits (of course for the purpose of determining the managerial remuneration) and s. 349(4)(k) mentions the quantum of the amount to the extent provided in s. 350. The computation of depreciation, as already stated can be made only in one of the modes provided in s. 205(2) of the said Act. These provisions also go to show that the depreciation that can be made a charge against profits in the P&L a/c prepared in accordance with the provisions of Parts II and III of the Sixth Schedule, can only be the amount specified in s. 205(2). In other words, Parts II and III of the Sixth Schedule do not enable to make a provision for making arrears of depreciation a charge against profits of that year. In this connection, it has to be noted that the provision in cl. 3(iv) of Part II is to the effect that the quantum of arrears of depreciation computed in accordance with s. 205(2) of the said Act, shall be disclosed by way of a note, which is only for the purpose of noting the financial stability of the company at a point of time and not for the purposes of making it a charge against the profits of any accounting period. Clause 4-A also provides that the P&L a/c shall contain a statement showing the computation of net profits in accordance with s. 349 of the Companies Act. There also, as already mentioned, deduction of only current year's depreciation is contemplated. This is for the purpose of determining the managerial remuneration provided under section 349. On a conspectus of the provisions of Parts II and III of Sch. VI and the provisions of ss. 205(2), 348, 349 and 350 of the Companies Act, we are of the view that the P&L a/c prepared in accordance with the provisions of Parts II and III mentioned above do not contemplate making of a provision for arrears of depreciation either separately or along with the current year's depreciation to be a charge against the profit of that year. Notwithstanding the above understanding of the provisions for arriving at the net profit contemplated in the first part of the Explanation, we will deal with the contention of the assessee regarding the adjustment of arrear depreciation worked out by the assessee pursuant to the introduction of Sch. XIV to the Companies Act with effect from 2nd April, 1987, based on the Guidance Notes on Accounting for Depreciation in Companies issued by the Institute of Chartered Accountants of India, New Delhi (Annexures E & G) and the Communication issued by the department of Company Affairs on 21st Oct., 1991 (Annexure D2).

13. As noticed earlier, s. 211 of the Companies Act providing for the form and contents of balance sheet and P&L a/c, sub-ss. (1) and (2) thereof state that the said documents shall give a 'true and fair view' of the profit or loss of the company for the financial year while complying with the requirements of Part II of Schedule VI. The expression 'true and fair view' has not been defined in the Companies Act. However, it casts an obligation on those who are in charge of the company's affairs to ensure that a true and fair view of the state of affairs is reflected in its accounts. The consideration for the said view is stated in Ramaiya's Guide to the Companies Act (1992) at p. 963 as follows -

"One, in their fiduciary capacity as agents, they have an obligation to report, and two, full and frank disclosure of information to enlighten the users of the accounts in the latter's decision-making".

According to the assessee, here comes the crucial role of the accountancy profession. It is in that context the assessee relies on the Guidance Note on Accounting for Depreciation in Companies issued by the Institute of Chartered Accountants of India (ICAI). It is stated that the ICAI from time to time issues guidance in the form of instructions to its members and they have issued Guidance Note on Accounting for Depreciation in Companies. It is also stated that the Accounting Standards Board (ASB) and the Auditing Practices Committee (APC), which are the various Committees of the ICAI, also issued Accounting Standards and Statements on Standard Auditing Practices from time to time. It is further stated that the objectives behind these Statements and Accounting Standards issued by the ICAI, ASB and APC, are to ensure to the extent possible that a true and fair view of the state of affairs of the company is made available to the users of that information. It is pointed out that the aforesaid Guidance Notes can be considered by the authorities and Courts for resolution of the dispute in this case. In support of the said stand, the counsel for the assessee relied on the decision of the Supreme Court in Challapalli Sugars Ltd. vs, CIT (supra), where the Supreme Court had to deal with a question as to whether interest paid before the commencement of production by the appellant- company, on the amounts borrowed by it for the acquisition and installation of plant and machinery, would form part of the 1 actual cost' of the assets to the appellant within the meaning of that expression in s. 10(5) of the Indian Income Tax Act, 1922, and as to whether the assessee would be entitled to depreciation and development rebate with reference to such interest also. The Supreme Court resolved the said question by drawing guidance from recognised normal accountancy practices prevalent in commerce and industry and the principles explained in accountancy books including the guidelines issued by the ICAI on the audit of accounts. The Supreme Court resorted to the above in the absence of a definition of the expression "actual cost' in the 1922 Act. It is by drawing analogy from the said decision the assessee submitted that in the absence of a definition of the expression "true and fair view", the assessee was perfectly justified in relying on the Guidance Note issued by the ICAI for its members who are in charge of auditing and certifying company accounts each year.

14. In this case, the assessee mainly relies on AS-6 regarding Depreciation in Accounting issued by the ICAI. AS-6, Paragraph 3.1 states that 'Depreciation' is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes, that depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset and that depreciation includes amortisation of assets whose useful life is predetermined. Clause 4 states that the depreciation has a significant effect in determining and presenting the financial position and results of operations of an enterprise and that the same is charged in each accounting period by reference to the extent of the depreciable amount, irrespective of an increase in the market value of the assets. Referring to the various aspects involved in the assessment of depreciation and the amount to be charged thereof in an accounting period, in Paragraph 11 it is stated that the quantum of depreciation to be provided in an accounting period involves the exercise of judgment by management in the light of technical, commercial, accounting and legal requirements and accordingly may need periodical review and that, if it is considered that the original estimate of useful life of an asset requires any revision, the unamortised depreciable amount of the asset is charged to revenue over the revised remaining useful life. It is also stated that alternatively, the aggregate depreciation charged to date is recomputed on the basis of the revised useful life and the excess or short depreciation so determined is adjusted in the accounting period of revision. Paragraphs 17 to 20 deal with disclosure. Paragraphs 21 to 30 deal with Accounting Standard. Paragraph 22 provides that the depreciation method selected should be applied consistently from period to period and that a change from one method of providing depreciation to another should be made only in the following circumstances:

(1) if the adoption of the new method is required by the statute; or (2) if the new method is required for compliance with an accounting standard; or (3) if it is considered that the change would result in a more appropriate preparation or presentation of the financial statement of the enterprise.

It also provides that when a change in the method of depreciation is made, the unamortised depreciable amount of the asset should be charged to revenue over the remaining useful life by applying the new method and further, such a change should be treated as a change in accounting policy and its effect should be quantified and disclosed.

15. It would appear from the Guidance Note, AS-5 and AS-6, particularly from the paragraphs mentioned above, that prior year depreciation can be separately provided in the P&L a/c and can be made a charge against the profit of the year along with the current year's depreciation. The reason stated is that this is required to have a true and fair account of the financial position of the company for the use of the public. But it is relevant to note that this accounting policy can be adopted only in a case where paragraph 22 of AS-6 mentioned above is attracted. Regarding the position as to whether a company, which follows the straight line method specified in s. 205(2)(b) of the Companies Act, can also provide for depreciation in respect of extra or multiple shift allowance, the Guidance Note issued by the ICAI is not very clear. It is stated in the Guidance Note that it has come to the notice of the Council of the ICAI that certain companies are not providing depreciation in respect of extra or multiple shift allowance and that some companies are writing back depreciation in respect of extra or multiple shift allowance provided in the past years under section 205(2)(b) of the Companies Act. The Council noted that this practice is not in accordance with the recommendations made in the Note on 'Provision for Depreciation' issued by the Research Committee of the ICAI. In such circumstances, the Research Committee was requested to express its opinion with regard to the correct charge for depreciation in so far as the accounts of a company are concerned and in so far as it is required to exhibit a true and fair view of the state of affairs of the company as on a given date and of the profit or loss for the year. It is seen from the Note that the question which has been referred for consideration of the Research Committee is whether it is obligatory on a company to provide for depreciation only on the basis mentioned in s. 350 or in s. 205(2) of the Act or whether these bases can be considered as indicating the minimum depreciation which must be provided by the company. The Research Committee opined that it is open to a company to provide for depreciation either on the written down value method or on the straightline basis, that the method adopted for providing the depreciation should be disclosed in the accounts, that in arriving at the rates at which the depreciation should be provided, the company must consider the true commercial depreciation, i.e., the rate which is adequate to write off the asset over its normal working life and that if the rate so arrived at is higher than the rates prescribed under section 350 or s, 205(2), the company should provide depreciation at such higher rate but if the rate so arrived at is lower than the rate mentioned in the above quoted sections, then the company should provide depreciation at the rates mentioned in those sections since these represent the minimum rates of depreciation to be provided. The Research Committee also opined that, where for the purpose of s. 350 or s. 205(2) income-tax rates are adopted, the rates to be considered are the normal rates together with the allowance for extra shift allowance.

16. It is seen that the Tribunal has also relied on the letter dt. 24th Sept., 1991 (Annexure D1) sent by the assessee and the reply dt. 21st Oct., 1991 (Annexure D2) sent by the Secretary, Company Law Board, for taking the view that the arrear depreciation can be debited in the P&L a/c of the year in question for arriving at the net profit of that year. It has not been brought to our notice any provision in the Companies Act authorising the Company Law Board to give any opinion in relation to any individual case or otherwise in the nature given in Annexure D2. We also could not see any provision in the Companies Act enabling the Company law Board to issue such a communication. That apart, there is absolutely nothing to show that the Company Law Board had considered the relevant provisions of the Companies Act regarding the preparation of balance sheet in accordance with the provisions of Parts 11 and III of the said Act. Except to say that the computation of net profit by charging arrears of depreciation for the earlier years also in the P&L a/c of the company for the period ended 31st Oct., 1987, is in accordance with the provisions of s. 205 of the Companies Act, 1956, r/w Parts 11 and III of the Sixth Schedule to the Companies Act, absolutely no reasons for arriving at the said conclusion had been stated. We are of the view that in the absence of a statutory provision enabling the Company Law Board to issue such directions, any opinion expressed by the Company Law Board cannot have any legal efficacy or any value in arriving at the net profit as per the P&L a/c prepared as above.

17. Now, we will consider the relevance and/or the application of the Guidance Note issued by the ICAI mentioned above with reference to the factual situation of this case. Extract of the P&L a/c and balance sheet for the year ended 31st Oct., 1987 produced as Annexure-H2 at page 183 under the head 'Expenditure', gives the details of depreciation as follows

17. Now, we will consider the relevance and/or the application of the Guidance Note issued by the ICAI mentioned above with reference to the factual situation of this case. Extract of the P&L a/c and balance sheet for the year ended 31st Oct., 1987 produced as Annexure-H2 at page 183 under the head 'Expenditure', gives the details of depreciation as follows "Depreciation (Note 7, Gross 4,17,20,438 Less Transferred from Revaluation Reserve Rs. 15,44,122-1986 Rs. Nil) -Rs. 4,01,76,316 It can also be seen that profit before taxation for the year is arrived at Rs. 14,52,30,357. It is seen that thereafter provision for taxation of Rs. 16,00,000 and depreciation relating to earlier years Rs. 13,66,39,051 are deducted to arrive at the net profit of Rs. 69,91,306. In Schedule 12-Notes on Accounts of the P&L a/c at page 191 of the paper book under Item 7 it is stated as follows:

"Depreciation for the year has been provided in the accounts in accordance with the provisions of s. 205(2)(b) of the Companies Act, 1956 taking into consideration extra-shift allowance, where applicable. Consequent on the above, a sum of Rs. 1366.39 lakhs being additional depreciation for the earlier years has been debited to the P&L a/c. Had the company followed the practice as in the previous year the profit for the year would have been higher by Rs. 120.44 lakhs (net)".

In this context, it is also) relevant to note that in the P&L a/c for the year ended 31st Oct., 1986 (Annexure-H1 at page 158 of the paper-book) profit for the year is arrived at after deducting depreciation of the current year and thereafter a deduction for depreciation relating to earlier years is seen made. In the Note to the said P&L a/c at page 167, Item No. 7 reads as follows:

'7. The depreciation for the year has been computed under section 205(2) of the Companies Act, based on.,

(a) the legal view that extra shift allowances need not be considered under straight line method under section 205(2)(b) of the Companies Act in respect of the plant and machinery.

(b) Company Law Board clarification that depreciation on additions to assets during a year need be computed on pro rata basis from the date of addition-

(c) Clarification issued in circular dt. 21st May, 1986 by the department of Company Affairs in respect of application of the revised rates of depreciation under the amended IT Rules in respect of various assets;

(d) Reclassification of certain items of plant under the main head 'Plant and machinery'.

A sum of Rs. 1267.60 lakhs representing depreciation provided in the accounts for earlier years in excess of the amount required to be provided as recomputed on the above basis has been adjusted in arriving at the depreciation relating to earlier years debited to the P&L a/c.

Had the company followed the practice adopted in previous years the charge of depreciation would have been higher by Rs. 31.27 lakhs. The extra shift depreciation not provided as per (a) above for the period up to 31st Oct., 1986 amounts to Rs. 1948 lakhs including Rs. 127 lakhs for the year."

It can be seen further from the letter dt. 24th Sept., 1991 (Annexure-D1) sent by the assessee- company to the Secretary, department of Company Affairs (extracted in the appellate order of the Tribunal at pages 60 and 61 of the paper-book) that while the company has been providing depreciation and appending necessary notes for arrears of depreciation in earlier years, company, in its P&L a/c for the captioned year, provided full depreciation for the relevant year as also balance of arrears of depreciation relating to earlier years and also referred to Note 7 to the P&L a/c for the year in question and requested to confirm as to whether as a consequence of provision of depreciation in terms of s. 205(2)(b), company's net profit of Rs. 69.91 lakhs is in accordance with Parts II and Ill of Schedule VI to the Companies Act. In reply to the said communication, the Company Law Board observed that the depreciation charged by the company for the relevant year, namely, 31st Oct., 1987 and also the charging of the arrears of depreciation for earlier years in the P&L a/c of the company for the period 31st Oct., 1987, is in accordance with the provisions of s. 205 of the Companies Act, 1956 r/w Parts II and EI of Schedule VI to the Companies Act, 1956, and therefore, the profit arrived at after the charging of such depreciation and arrears of depreciation in respect of the earlier years, appears to be in accordance with the provisions of the Companies Act, 1956. From the modus operandi adopted by the company for debiting the arrear depreciation for the prior years as discussed above, it would show that the company in fact did not change the method of computation of depreciation provided in s. 205(2) of the Companies Act. In other words, the company continued to compute the amount of depreciation as per the method provided under section 205(20), viz., straightline method and in addition to the same, calculated depreciation on the basis of extra-shifts worked by the company on its plant and machinery from the date of acquisition of its original assets. According to us, this is not a matter covered by the Guidance Note contained in AS-5 or AS-6. This practice adopted by the assessee during the year in question cannot also be considered as permissible under the Guidance Note issued by the ICAI under the head 'Provision for depreciation in respect of extra or multiple shift allowance' occurring in pages 122 to 124 of the paper-book produced as Annexure-F which we have already mentioned above. This is further clear from the view expressed by the Research Committee of the ICAI to the effect that where, for the purposes of s. 350 or s. 205(2) income-tax rates are adopted, the rates to be considered are the normal rates together with the allowance for extra-shift working. It must be noted that the reference to s. 205(2) there can only be with reference to cl. (a) thereof, which refers to s. 350 and not with respect to cl. (b) or cl. (c) of sub-section (2) of s. 205.

18. We will also consider the significance of the amendment to the Companies Act particularly s. 350 and the introduction of Sch. XIV for the said purpose. It can be seen from Sch. XIV itself that there is reference to ss. 205 and 350. That is for the reason that cl. (a) of sub-section (2) of s. 205 requires the application of Sch. XIV in view of s. 350. In this context, it has to be noted that prior to the amendment of s. 350 of the Companies Act, 1956, by the Companies (Amendment) Act, 1988 with effect from 15th June, 1988, the position was that the rate of depreciation under section 350 was as provided under the Income Tax Act, 1922, and Rules made thereunder. As per the Rules issued under the Income Tax Act, as it stood at the relevant time, the assessee could have provided for depreciation including therein extra and multiple shift allowances. Since the company did not adopt the method provided under cl.(a) of s. 205(2) of the Companies Act, the income-tax rates regarding depreciation did not apply. As already stated, the amendment of the Companies Act made in 1988 deleted that portion of s. 350 which provided for computation of the depreciation at the rates prescribed in the Income Tax Act and the Rules issued thereunder as above and substituted the words "at the rate specified in Sch. XIV". It has to be noted that though the amendment was made on 24th May, 1988, Sch. XIV was given effect from 2nd April, 1987 for the reason that the IT Rules was also amended with effect from the said date. But it has to be noted that though Sch. XIV is given retrospective effect from 2nd April, 1987, amendment to s. 350 was effective only from 15th June, 1988. Schedule XIV comes into play only by virtue of s. 350 of the Act. We have stated all these only to show that the amendment made to the Companies Act has no relevance so far as a company which is following the method of computation of depreciation as provided under section 205(2)(b) of the Companies Act. In other words, the amendment of the provisions of s, 350 and the introduction of Sch. XIV have relevance only in so far as companies which follow the method of computation of depreciation provided under cl. (a) of s. 205(2) of the said Act. Rightly, the company is also not adopting the rates provided in Sch. XIV. What the Co. has done is only to calculate the depreciation under cl. (b) of s. 205(2) drawing analogy from Sch. XIV, viz., providing depreciation both under straight line method and for extra shifts by the mode prescribed in the Schedule. This, according to us, is not sanctioned by any of the guidelines issued by the ICAI or its Committees. According to us, this method of computation of depreciation for all the earlier years and to lump it for adjustment against the profit of the current year, is not contemplated for arriving at the net profit in the P&L a/c prepared as per Parts II and III of Sch. VI to the Companies Act. It would appear that this practice of computation of depreciation for the current year was accepted by the authorities from the fact that the sum of Rs. 4,17,20,438 computed as depreciation by the assessee in the P&L a/c is seen accepted by the assessing authority and from the fact that a sum of Rs. 4,00,91,301 is seen deducted which has not been interfered with by the first appellate authority. For these reasons, we are of the view that the Guidance Notes issued by the ICAI also are of no assistance to the assessee for making deduction of the sum of Rs. 13,66,39,051 in the computation of net profits as per the P&L a/c prepared in accordance with the provisions of Parts 11 and III of Sch. VI to the Companies Act.

19. Now we will go to the next step in the computation of book profit. As stated earlier in this judgment, the first step under the Explanation to s. 115J is to arrive at the net profit. Once the net profit is arrived at from the P&L a/c prepared in accordance with the provisions of Parts II and III of the Sixth Schedule to the Companies Act, the next step is to make the adjustments provided in cls. (a) to (f) and (i) to (iii) of the said Explanation. The net profit arrived at as above will have to be increased by the income-tax paid or payable or the provision thereof, amount carried to any reserve, provision made for liabilities other than ascertained liabilities, provision for losses of subsidiary companies or the amount or amounts of dividends paid or proposed and the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies. These additions to the net profit can be made only if the amounts mentioned above are debited to the P&L a/c. The amount so arrived at has to be reduced by the amounts withdrawn from reserves or the amount of income to which any of the provisions of Chapter III applies; both, only in a case where the said amounts are credited to the P&L a/c. Clause (iii) of the Explanation, which is the crucial clause so far as the main dispute in this case is concerned, provides for the reduction of the amount of any brought forward losses or unabsorbed -depreciation, whichever is less, as computed under the provisions of s. 205(1)(b) of the Companies Act, 1956 for the purposes of declaration of dividends. It is necessary to note at this point that there is no controversy or dispute with regard to the adjustments contemplated under cls. (a) to (f) or under cls. (i) and (ii) of the Explanation. The controversy/dispute is only with regard to the scope and content of cl. (iii) above. Before considering the said question, it is necessary to have a little more background of the introduction of the provisions of s. 115J. We have already pointed out earlier that prior to the introduction of s. 115J by the Finance Act, 1987 with effect from 1st April, 1988, there was a provision applicable to all companies regarding the quantum of deductions in respect of certain reliefs provided under the Act introduced by the Finance Act of 1983 with effect from 1st April, 1983, i.e., Chapter VI-B s. 80VVA. Under sub-section (1) of s. 80VVA, in the case of companies where the aggregate amount of deduction admissible under the provisions of sub-section (2) mentioned above exceeded seventy per cent of the total income computed before making such deductions, the amount to be deducted under those provisions was restricted to seventy per cent of the total income as computed before making such deductions. Sub-section (2) of s. 80VVA specified the provisions regarding various deductions allowable to a company under the Act. This provision itself was enacted, as could be seen from the Budget Speech of the Finance Minister for the financial year 1983-84, with a view to securing that the various deductions in respect of tax concessions admissible under the Income Tax Act did not result in reducing the taxable income of companies to the extent that no tax or only a negligible tax would be payable by profit-making companies. The object and background under which s. 115J came to be enacted, is stated by the Andhra Pradesh High Court in (1994) 119 CTR (AP) 184 : (1994) 207 ITR 508, 532 (AP) : , (supra) as follows :

"Sec. 115J was introduced in the assessment year 1988-89. Prior to the insertion of this provision, s. 80VVA provided for payment of tax on at least thirty per cent of the income. Studies carried out by the CBDT revealed that while the provisions of s. 80VVA had the effect of subjecting companies to minimum tax which they would have otherwise not paid, there were still companies which had no income-tax liability despite substantial profits, on account of the fact that companies were availing of depreciation in full under the Income Tax Act. Therefore, despite s. 80VVA, the phenomenon of prosperous zero tax companies continued. A study carried out by an economic journal in regard to the performance of 650 top companies during the assessment year 1984-85 showed that out of the top 23 profit-making companies, the P&L a/c of 12 companies showed no income-tax liability though they had profits and had declared dividends. About 28 per cent of the companies (139 companies) accounting for a net profit of Rs. 274 crores showed no tax liability. Therefore, s. 80VVA had become otiose. Therefore, the necessity to introduce the impugned provision, viz., s. 115J, arose in order to tackle the problem of zero tax prosperous companies to ensure minimum corporate tax by suitably modifying s. 8OVVA. With the avowed object of bringing the zero tax prosperous companies within the taxable net, s. 115J has been enacted".

Circular No. 495 dt. 22nd Sept., 1987 [(1988) 67 CTR (St) 1 : (1987) 168 ITR 110 (St) 41, issued by the CBDT also explains the scope and object of the new provision,

20. It must be noticed from the provisions of cls. (a) to (f) and cls. (i) and (ii) of the Explanation that it was in the contemplation of the legislature while mentioning about the preparation of the P&L a/c in accordance with the provisions of Parts 11 and III of the Sixth Schedule for arriving at the net profit that the companies may debit the amounts specified in those clauses in the P&L a/c for arriving at the net profit. It can also be discerned that the intention of the legislature was not to allow the said deductions while computing the 'book profit' for the purpose of the section. But when it came to the provisions of cl. (iii) of the Explanation, the legislature did not say that the deduction provided under the said clause can be made only if such amount is credited to the P&L a/c. It would appear from the above, especially in view of the provisions of cls. (a) to (f) and cls. (i) and (ii) which provide for addition or reduction only in case of debit or credit of the said amounts in the P&L a/c that the legislature's intention was that the provision for unabsorbed loss or unabsorbed depreciation is not an item for debit in the P&L a/c prepared in accordance with the provisions of Parts 11 and M of the Sixth Schedule. It would further appear that it is for that reason that the legislature wanted to make a deduction of an amount equivalent to the amount of loss or the amount of depreciation, whichever is less, for arriving at the book profit. It is also worthwhile to refer to the observations made by the Delhi High Court in National Thermal Power Corporation Ltd. vs. Union of India & Ors. (1991) 96 CTR (Del) 140 : (1991) 192 ITR 187 (Del) . That was a case filed under Art. 226 of the Constitution of India challenging the provisions of s. 115J of the Act. While dismissing the writ petition, Justice B.N. Kirpal (as his lordship then was) observed:

"This provision, namely, s. 115J, was brought in the statute book in an effort to tax what is commonly known as "zero tax companies". These are companies which have, in fact, large profits in its books but, for the purpose of the Income Tax Act, by virtue of various deductions which have been claimed, very little taxable income is disclosed. It is in an effort to bring such types of companies within the taxable net that s. 115J was inserted by Parliament. We are unable to agree with learned counsel for the petitioner that this provision is violative of Art. 14 and 19 of the Constitution."

21. Now we will consider the provisions of cl. (iii) of the Explanation to s. 115J, which reads as follows:

"(iii) 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 cl. (b) of the first proviso to sub-section (1) of s, 205 of the Companies Act, 1956 (1 of 1956), are applicable."

Since the said clause reads into it the provisions of cl. (b) of the first proviso to sub-section (1) of s. 205 of the Companies Act, 1956, it is necessary to refer to that provision also, which reads as follows:

"(b) if the company has incurred any loss in any previous financial year or years, which falls or fall after the commencement of the Companies (Amendment) Act, 1960, then, the amount of the loss or an amount which is equal to the amount provided for depreciation for that year or those years whichever is less, shall be set off against the profits of the company for the year for which dividend is proposed to be declared or paid or against the profits of the company for any previous financial year or years, arrived at in both cases after providing for depreciation in accordance with the provisions of sub-section (2) or against both";

In order to have a full picture of the scope of the provisions of cl. (b) of the first proviso to sub-section (1), it will be useful to refer to the provisions of s. 205(1) and cl. (a) of the first proviso also, which read as follows:

"Sec. 205. Dividend to be paid only out of profits-(1) 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) or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with those provisions and remaining undistributed or out of both or out of moneys provided by the Central Government or a State Government for the payment of dividend in pursuance of a guarantee given by that Government Provided that-

(a) if the company has not provided for depreciation for any previous financial year or years which falls or fall after the commencement of the Companies (Amendment) Act, 1960, it shall, before declaring or paying dividend for any financial year provide for such depreciation out of the profits of that financial year or out of the profits of any other previous financial year or years";

It is to be noted that cl. (iii) of the Explanation extracted above shows that the provisions of cl. (b) of the first proviso to sub-section (1) of s. 205 of the Companies Act, 1956, are made applicable for the purposes of determining the amount of deduction under cl. (iii). In other words, the provisions of cl. (b) of the first proviso to sub-section (1) of s. 205 of the Companies Act, have been read into cl. (iii). It is necessary, therefore, to consider as to what exactly the legislature means when it says 'as if the provisions of cl. (b) of the first proviso to sub-section (1) of s. 205 of the Companies Act 1956 is applicable'. Does it mean cl. (b) in its entirety is to be applied or only to the extent required for effectuating the object of cl. (iii) of the Explanation? Clause (iii) provides for deduction of 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. If the clause ends there, there would not have been any difficulty. The loss means 'business loss' and the loss required to be set off may include carried forward loss also subject to the limitations contained in s. 72 of the Act. Likewise, the amount of depreciation required to the set off is the unabsorbed depreciation of the earlier years along with the current year's depreciation as provided in s. 32(2) of the Act. The word 1 or' used in cl. (iii) could have been read as 'and' thereby either 'loss' or depreciation and in cases where there is loss as well as depreciation both could have been deducted. But the clause does not stop there. It says 'as if the provisions of cl. (b) are applicable'. If cl. (b) is to be applied independently, then the company should have incurred a 'loss' in any previous year or years in which case either the amount of the loss or an amount which is equal to the amount provided for depreciation for that year or those years whichever is less can be set off against the profits of the year in question. It also provides for calculation of the depreciation for the said purpose in accordance with s. 205(2) of the Companies Act. So, in a case where cl. (b) applies, there is a requirement of computation of depreciation in accordance with s. 205(2) above. As already stated, s, 205(2) is the charging section so far as depreciation is concerned and it provides for three or four modes of computation of depreciation and the option is given to the assessee to choose one or the other modes. Here the question is, regarding the scope of the expression 'loss', as to whether it includes depreciation also or if the loss is solely on account of depreciation, can it be treated as loss for the purposes of cl. (b). In the context in which the expression 'loss' is used in cl. (b), it cannot be said to include 'depreciation'. The clause refers to 'loss' and an amount equal to depreciation that too whichever is less. It is for the purposes of demonstrating that the expression 'loss' in cl. (b) does not take in depreciation we have extracted the provisions of cl. (a) of the first proviso to s. 205(1) also. Clause (a) of the first proviso to s. 205(1) specifically states that if the company has not provided for any depreciation for any previous financial year or years which falls or fall after the commencement of the Companies (Amendment) Act, 1960, it shall, before declaring or paying dividend for any financial year, provide for such depreciation out of the profits of that financial year or out of the profits of any other previous financial year or years. From the above, it would appear that cl. (b) of the first proviso to sub-section (1) of s. 205, when it says 'if the company had incurred any loss' and also 'then, the amount of the loss', the expression "Ioss" occurring therein can mean only 'loss' excluding 'depreciation', for, cl.(a) mentioned above had already provided for depreciation. If the expression 'loss' in cl. (b) of the proviso is understood as including depreciation also, then it will result in double deduction of the amount of depreciation for purposes of s. 205(1) of the Companies Act. Take the case of assessee itself. The assessee had provided depreciation for the earlier years only at the SLR rates and did not provide for extra shifts worked. Assume that the assessee was entitled to provide for that also in those years. If the assessee is to declare 'dividend' from the profit for the year 1988-89, in view of the provisions of cl. (a) of the first proviso, it has to calculate the depreciation for the earlier years and provide the same for adjustment against the profit of 1988-89. Then, if the 'loss' referred to in cl. (b) includes 'depreciation' also and if the loss is only on account of the unabsorbed depreciation, then the very same amount which has already been considered under cl. (a) has to be adjusted again. According to us, cl. (b) of the first proviso does not contemplate such a situation, for, legislature cannot be attributed with such an intention of double deduction. It would appear from a conjoint reading of cl. (iii) of the Explanation and cl. (b) of the first proviso to s. 205(1) that cl. (b) has been made applicable only for the computation of depreciation in accordance with the provisions of s. 205(2) and for the purpose of taking the lesser of the two. Then the scheme of cl. (iii) will be clear which is to the following effect: The business loss (i.e., loss excluding depreciation) or the amount of depreciation for the year or years computed in accordance with s. 205(2) whichever is less, is to be deducted under cl. (iii). This interpretation is consistent with the scheme of the Income Tax Act also. We have already extracted the object of introduction of s. 115J discussed in the decisions of the Andhra Pradesh High Court and Delhi High Court mentioned earlier. There it was noticed that in spite of the restrictions on deductions imposed by s. 8OVVA, the result turned out to be unproductive and hence s. 115J was introduced to make prosperous companies which are zero tax companies under the provisions of the Act liable to pay some tax for the development of the country. If that is the object, the 'loss' referred to in cl. (iii) can never mean loss including depreciation. If the view that 'loss' includes depreciation also is taken, the very purpose of the section can be defeated. We are, therefore, of the view that the 'loss' mentioned in cl. (iii) of the Explanation to s. 115J does not include depreciation. This is the position with regard to the expression 'loss' mentioned in cl. (b) of the first proviso to sub-section (1) of s. 205 of the Companies Act also. We are also of the view that unless there is 'loss' as understood above in any year, there is no scope for the application of cl. (iii) of the Explanation.

22. The view taken by us as above viz., the expression 'loss' used in cl. (iii) does not include depreciation, is supported by the decision of the Andhra Pradesh High Court in V.V. Trans-Investments (P) Ltd. vs. CIT (supra). That was a case where the Andhra Pradesh High Court considered the reference along with a batch of writ petitions challenging the provisions of s. 115J. One of the questions referred for the decision of the High Court was as to whether the Tribunal was justified in law in holding that the 'loss' as it appears in s. 205(1), first proviso, cl. (b) of the Companies Act, 1956, r/w s. 115J of the Income Tax Act, 1961, means 'including depreciation'? In that case, the first year of assessment of the company was 1987-88. During that year there was a profit. In the assessment year 198889 there was a profit of Rs. 35,79,997 before depreciation and the depreciation debited to the P&L a/c was Rs, 67,75,759. Thus, the net result after adjusting depreciation was a loss to the tune of Rs. 31,95,762. For the assessment year 1989-90 there was a current year's profit of Rs. 28,37,947. The assessee- company filed its return of income disclosing "nil" income after setting off a part of arrears of depreciation against the current year's profit of Rs. 28,37,947. The Income Tax Officer, however, computed the book profit under section 115J of the Income Tax Act, at Rs. 8,51,380, being 30 per cent of the current year's profit of Rs.28,37,947 as per the P&L a/c. According to the Income Tax Officer,' for arriving at the adjusted book profit, unabsorbed depreciation or business loss, whichever is less, is to be adjusted and 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 deducted from current year's profit of Rs. 28,37,947. Before arriving at the book profit. The view taken by the assessing officer was confirmed by the first appellate authority and by the Tribunal. It is in these circumstances the question mentioned earlier came up for consideration before the High Court. The Andhra Pradesh High Court first considered the effect of the reference to Parts 11 and III of Sch. VI and s. 205(1), first proviso, cl. (b) of the Companies Act in the Explanation to s. 115J and observed that the effect of this legislative method would amount to incorporation by reference of the provisions of Parts II and III of Sch. VI and s. 205(1), first proviso, cl. (b) of the Companies Act. The Court, relying on the decisions of the Supreme Court in Bolani Ores Ltd. vs. State of Orissa AIR 1975 SC 17, Mahindra & Mahindra Ltd. vs. Union of India (1979) 49 Comp. Cas. 419 (SC) and Onkarlal Nandlal vs. State of Rajasthan (1985) 4 SCC 404, all dealing with the effect of such reference, further observed at page 531 as follows:

"From the above, it followed that the provision of an enactment can be incorporated into another enactment by reference. If such an incorporation is made, it is not necessary to refer to the parent Act from which the provision is borrowed. It is to be incorporated as if the provision is made in the enactment where it is incorporated. We have already referred to cl. (iv) under the Explanation to s. 115J of the Income Tax Act. In view of the law laid down by the Supreme Court, it is an instance of legislation by incorporation. In other words, s. 205(1)(b) of the Companies Act is actually written in cl. (iv) under the Explanation to s. 115J of the Income Tax Act and, therefore, there is no occasion to refer to the Companies Act, 1956, at all.

Therefore, while computing the provision of s. 115J of the Act, there is no need to refer to the provision of s. 205(1), first proviso, cl. (b) of the Companies Act from which the provision in s. 115J is borrowed and we must proceed to apply the provision of s. 115J of the Income Tax Act, as if s. 205(1), first proviso, cl. (b) of the Companies Act was written out verbatim in s. 115J of the Income Tax Act. In other words, when once the provision under section 205(1), first proviso, cl. (b) is incorporated in cl. (iv) of the Explanation to s. 115J of the Income Tax Act, it is only the said provision that is so incorporated that has to be looked into for the purpose of interpreting the scope and ambit of cl. (iv) under the Explanation to s. 115J.', Thereafter, the said Court considered the scope of cl. (iv) of the Explanation cl. (iii) at the relevant time. The Court, after considering the object and background of introduction of s. 115J and the concepts of 'loss' and 'depreciation' under the Act particularly with reference to the provisions of ss. 32 and 70 to 73 of the Act, took the view that the assessee is entitled to deduct depreciation or loss, whichever is less, only when in a given year there is loss as well as depreciation and in such a case, the lesser of the amounts will be allowed to be deducted as per the provisions of the Income Tax Act. It was also observed that in case there is profit in a year, but after adjustment of depreciation, it results in loss, no adjustment in book profit under section 115J can be allowed. The Court further observed that the interpretation of 'loss' and 'depreciation' for the purpose of declaring dividend under the Companies Act, 1956 is irrelevant and their interpretation under cl. (iv) of Explanation to s. 115J of the Act should be in accordance with the provisions of the Income Tax Act. The Court also observed that it may be that under the Companies Act the 'unabsorbed depreciation' may be included in the 'unabsorbed loss' i.e., for the purpose of declaring the net loss or net profits but as per the Income Tax Act 'unabsorbed loss' need not always include 1 unabsorbed depreciation' or 'current depreciation' since both the losses, unabsorbed loss, current depreciation and unabsorbed depreciation have been dealt with under the Income Tax Act distinctly while adjusting the income. The Court in that regard referred to the decisions of the Supreme Court in Garden Silk Weaving Factory vs. CIT (1991) 94 CTR (SC) 136 : (1991) 189 ITR 512 (SC) : and CIT vs. Mother India Refrigeration Industries (P) Ltd. (1985) 48 CTR (SC 176 : (1985) 155 ITR 711 (SC , and observed that the view expressed by the larger Bench in Mother India Refrigeration's case mentioned supra supports the above view. The Andhra Pradesh High Court finally held that the computation to be made for the purpose of declaring dividend under the Companies Act cannot be adopted for the purpose of computing the taxable income under the provisions of the Income Tax Act and that, for the purpose of s. 115J of the Act, "loss" does not include "unabsorbed depreciation".

23. The scope of the expression 'loss' used in Explanation (iii) to s. 115J came up for consideration before the Madhya Pradesh High Court also in Bhilai Wires Ltd. vs. CIT (1998) 149 CTR (MP) 533: (1998) 231 ITR 288 (MP). The appellant-company in that case filed a return (revised return) with a computation of income under section 115J of the Act showing the book profit at Rs. 8,30,178 and declared the income at 30 per cent of the above amounting to Rs. 2,49,053. The assessing officer did not accept the above computation and determined the book profit at Rs. 23,54,504. The Commissioner (Appeals) affirmed the same but in second appeal the Tribunal accepted the computation made by the assessee relying on the decision of the Tribunal in Surana Steels (P) Ltd. vs. Dy. CIT (1993) 46 TTJ (Hyd)(SB) 458.. (1993) 201 ITR 1 (AT) [It must be noted here that the decision mentioned above was also the subject-matter of the decision of the Andhra Pradesh High Court in V.V. Trans-Investments (P) Ltd. case mentioned earlier]. That Court, after referring to the scheme of s. 115J, cl. (iii) thereof and the provisions of cl. (b) of the first proviso to s. 205(1) of the Companies Act, 1956, observed that cl. (b) of the first proviso to sub-section (1) of s. 205 of the Companies Act has been bodily lifted and incorporated in the Income Tax Act for working out the profit and loss for the company to work out the book profit and that the idea is that in any previous year if the book profit is to be worked out, then the deductions of the loss or depreciation have to be given but it is qualified that both cannot be made simultaneously either of them, whichever is less. The Court further observed as follows:

"Therefore, in a case where the income is less than thirty per cent of the book profit, then in order to get the benefit of s. 115J, the company has to prepare the account of profit and loss in terms of cl. (b) of the first proviso to sub-section (1) of s. 205 of the Companies Act, and on that basis, the assessee will be entitled to deduct depreciation or a loss whichever is less only when in a given year, there is a loss as well as depreciation. The assessee will not be entitled to both the benefits simultaneously. We need not dilate on this issue how the loss or depreciation is to be worked out. Suffice it to say that the provisions of the Income Tax Act will come into play for such exercise and it has to be worked out in terms of the Act. So far as the depreciation is concerned under sub-section (1) of s. 32 of the Income Tax Act, it can be permitted in the previous year till it is exhausted, but the same is not applicable in the case of loss but it has to be worked out in terms of ss. 70, 71 and 72 of the Income Tax Act."

The Court in that case set aside the order of the Tribunal, for, it did not consider even the question as to whether there was any depreciation or loss at all during the years 1986-87 and 1987-88. It would appear from the above quoted observations that the Madhya Pradesh High Court also has taken the same view as that of the Andhra Pradesh High Court.

24. The question as to whether the expression "loss" as it appears in s. 205(1), first proviso, cl. (b) of the Companies Act, 1956 r/w s. 115J of the Income Tax Act, 1961 means 'excluding depreciation', came up for consideration before the same Court in Krishna Oil Extraction Ltd. vs. CIT (1998) 144 CTR (MP) 660 : (1998) 230 ITR 806 (MP). The assessee in that case was a company engaged in the business of oil extraction. It filed a return of income claiming under section 115J(1A), Expln. (iv), of the Income Tax Act that the loss (including depreciation) and depreciation whichever is less, is to be deducted from the current year's book profit. The assessing officer interpreted the word "loss" as appears in s. 205(1), cl. (b) of the first proviso, of the Companies Act r/w s. 115J(1A), ExpIn. (iv), of the Income Tax Act, as loss excluding depreciation. The Commissioner (Appeals) confirmed the order of the assessing officer. The Tribunal in appeal, relying on the decision of the Andhra Pradesh High Court in V.V. Trans Investrnents (P) Ltd. vs. CIT (supra), held that the claim of the assessee regarding allowance of a sum of Rs. 18,15,787 cannot be considered. That is how the question mentioned above has arisen before the High Court. Referring to the provisions of ExpIn. (iv) to s. 115J(1) and the provisions of s. 205(1), cl. (b) of the first proviso to the Companies Act, the Court observed as follows:

"On a reading of these provisions together, it transpired that cl. (b) of the first proviso to sub-section (1) of s. 205 of the Companies Act has been fictionally incorporated in the Income Tax Act. By virtue of the statutory incorporation, the book profit has to be worked out under section 115J in tems of cl. (b) of the first proviso to s. 205(1) of the Companies Act. According to cl. (b) of the first proviso to s. 205(1) of the Companies Act, it clearly transpires that, if the company has incurred any loss in any previous financial year or years, which falls or fall after the commencement of the Companies (Amendment) Act, 1960, then the amount of the loss or an amount which is equal to the amount provided for depreciation for that year or those years whichever is less, shall be set off against the profits of the company for the year for which dividend is proposed to be declared or paid or against the profits of the company for any previous financial year or years, arrived at in both the cases after providing for depreciation in accordance with the provisions of sub-section (2) or against both. Sub-section (2) of s. 205 of the Companies Act says how depreciation has to be worked out. The basic idea behind cl. (b) of the first proviso to sub-section (1) of s. 205 is that, after working out depreciation or loss for that year or those years, whichever is less, shall be set off against the profits of the company for the year for which dividend is proposed to be declared. Therefore, as a result of this statutory incorporation, the loss or depreciation whichever is less, shall be set off. In this connection, our attention was invited to the decision of the Andhra Pradesh High Court in the case of V.V. Trans-Investments (P) Ltd. vs. CIT (1994) 119 CTR (AP) 184 : (1994) 207 ITR 508 (AP) : . In that case, it was held that s. 205(1)(b) has been fictionally incorporated in the Income Tax Act but still their Lordships have worked out the profit and loss in terms of the Income Tax Act and not by a borrowed enactment, i.e., under the Companies Act. Once we have held that s. 205(1)(b) of the Companies Act stands adopted under the Income Tax Act, then the loss and depreciation have to be worked out in terms of the Companies Act and then the set off has to be given of either of the two and whichever is less; therefore, in our opinion, the depreciation and loss have to be worked out in terms of the borrowed Act, i.e., under section 205(1)(b) of the Companies Act, and not under the Income Tax Act."

Though it would appear from the aforesaid observations of the Madhya Pradesh High Court that they have dissented from the view taken by the Andhra Pradesh High Court in V.V Trans-Investments (P) Ltd. case mentioned above to the effect that once the provisions of s. 205(1), first proviso, cl. (b) has been fictionally incorporated in the Income Tax Act the profit and loss have to be worked out in terms of the Income Tax Act and not under the Companies Act, they have taken the view that the loss and depreciation have to be worked out in terms of the Companies Act. From the conclusion reached by the Court, it would appear that the question was answered in the affirmative, viz., the Tribunal was right in law in holding that the 'loss' as it appears in s. 205(1), first proviso, cl. (b), of the Companies Act, 1956 r/w s. 115J of Income Tax Act, 1961, means excluding depreciation. We have already taken the view that the expression 'loss' as it appears in s. 205(1), first proviso, cl. (b) of the Companies Act, r/w cl. (iii) of the Explanation to s. 115J of the Income Tax Act, will not take in depreciation. The conclusion reached by the High Court of Andhra Pradesh and by the Madhya Pradesh High Courts in the aforesaid two case, accords with the view taken by us.

25. We would in this context also note that s. 115J of the Act, by a fiction, fixes 30 per cent of the 'book profit' of an assessee which is a company as its total income chargeable to tax for the relevant previous year. This, as the section itself says, is notwithstanding anything contained in any other provisions of this Act regarding computation of its total income. This notional fixation of total income for the purpose of s. 115J does not affect the right of the company to carry forward the unabsorbed depreciation, development rebate and loss which it is entitled to under the provisions of ss. 32(2), 32AQ) or under cl. (ii) of sub-section (1) of s. 72, etc., as is evident from sub-section (2) of s. 115J itself. This is also indicative of the fact that the legislative intention is not to grant all the reliefs which the assessee- company would have been entitled to in the computation of its total income under the provisions of the Act, while computing the income under section 115J of the Act. That apart, it is relevant to note that the provisions of s. 115J was in force only in respect of the previous years relevant to the assessment years commencing on or after the first day of April, 1988, but before the first day of April, 1991. Thereafter, the said provision, though it remained in the statute book, was not in force for the subsequent assessment years. Later, the legislature has inserted a new provision, s. 115JA by s. 39 of the Finance (No. 2) Act, 1996 (33 of 1996) with effect from 1st April, 1997. In the memorandum explaining the provisions in the Finance (No. 2) Bill, 1996 it is stated as follows:

"In recent times, the number of zero-tax companies and companies paying marginal tax has grown. Studies have shown that inspite of the fact that companies have earned substantial book profits and have paid handsome dividends, no tax has been paid by them to the exchequer.

The new s. 115J provides for those companies to pay tax on 30 per cent of the book profits, whose total income as computed under the Income Tax Act is less than 30 per cent of the book profits as per the books of account prepared in accordance with Parts II and III of Schedule VI to the Companies Act, 1956 "Book Profit" is defined and certain adjustments are provided in the newly inserted section.

This amendment will take effect from 1st April, 1997, and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years."

We refer to the new provision only to show that the said provision is, by and large, similar to the provisions of s. 115J itself. The only difference is that the said section has been restructured and certain minor changes are also made. As per sub-section (2) of s. 115JA, every assessee, being a company, shall, for the purposes of s. 115J, prepare its P&L a/c for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. It provides that while preparing P&L a/c, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the P&L a/c laid before the company at its annual general body meeting in accordance with the provisions of s. 210 of the Companies Act, 1956. It also provides that where a company has adopted or adopts the financial year under the Companies Act, 1956, which is different from the previous year under the Act, the method and rates for calculation of depreciation shall correspond to the method and rates which have been adopted for calculating the depreciation for such financial year or part of such financial year falling within the relevant previous year. The Explanation to sub-section (2) provides that for the purposes of this section, "book profit" means the net profit as shown in the P&L a/c for the relevant previous year prepared under sub-section (2) with the adjustments provided in cls. (a) to (f) and (i) to (vii). Clause (iii) of the Explanation refers to the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account. The Explanation thereto says that for the purposes of this clause, the loss shall not include depreciation. Though the provisions of s. 115JA are applicable only for the assessment year 1997-98 onwards, it would appear that the restructuring of the section was necessitated only because of the dispute in regard to the determination of 'book profit' pending before the Courts and Tribunals. According to us, the effect of cl. (iii) together with the Explanation thereto in the Explanation to sub-section (2) of the new s. 115JA, is to clarify the legislative intention behind cl. (iii) of the Explanation to sub-section (1) of s. 115J of the Act. This also supports the view taken by us to the effect that the expression "the loss" used in s. 115J means "excluding depreciation". We are of the view that the findings rendered by the Tribunal and detailed in paragraph 6 above in so far as they are inconsistent with what we have stated4 above, cannot be sustained.

26. It is seen that the Commissioner (Appeals) in the appellate order (Annexure-13) discussed the question regarding the adjustments to be made in the net profit as provided in cls. (a) to (f) and (i) to (iii) of Explanation to s. 115J of the Act and observed as follows:

"It can be seen from the above that the amount of Rs. 14,36,34,034 was arrived at by the assessing officer without considering the provisions of cl. (iii) of Explanation to s. 115J. As I have discussed in the preceding paragraph, it is necessary to give set off for business loss or depreciation whichever is less, in accordance with s. 205Mb of the Companies Act for determining the book profit. This has to be ascertained from the P&L a/c of the company from the very beginning as the company was incorporated only after the introduction of the Companies (Amendment) Act. After ascertaining the business loss and depreciation separately, the assessing officer should give deduction on lesser of the two amounts and arrive at the profit for determining the total income chargeable to tax as contemplated in s. 115J. Therefore, this part of the order requires to be set aside at this stage. The assessing officer will determine the tax accordingly".

This portion of the order has not been challenged by the Revenue before the Tribunal and, therefore, it has become final. This is a matter for the assessing officer to consider when he gives effect to the consequential order of the Tribunal, if it has not already been done earlier.

27. The next question is regarding the claim made by the assessee under section 32AB of the Act. Question Nos. 2 and 3 referred by the Tribunal for our opinion in IT Ref. No. 70/94 relate to the said claim. Question No. 2 referred to in IT Ref. NG. 43/97 is in a way connected with the said question. The Tribunal itself in para 4 of the supplementary statement of case (IT Ref. No. 43/97) has stated it to be so. Accordingly, we will consider the said two questions together. The assessee- company during the previous year had purchased certain new machinery/plant from out of its income chargeable under the head "Profits and gains of business or profession". In terms of sub-cl. (ii) of cl. (b) of sub-section (1) of s. 32AB, the assessee would be entitled to a deduction of twenty per cent of the profits of eligible business. Sub-section (2) of s. 32AB defines "eligible business". The assessee, inter alia, had included a sum of Rs. 1,51,89,760 representing the dividend on units of Unit Trust of India in the computation of the profits of eligible business. The assessing authority excluded the said amount from the profits of eligible business on the ground that it is not income from eligible business. The Commissioner (Appeals) confirmed the same. On appeal, the Tribunal allowed the claim of the assessee. The reasons for allowing the said claim are contained in para 44 of the appellate order of the Tribunal. The relevant portion is extracted below :

"From the language of s. 32AB and the circular thereunder, it is clear that investment deposit or/the purchase of a new asset or plant must have come out of the income chargeable to profits and gains of business or profession. Since the income from units of Units Trust of India is chargeable under the head "other sources", the same cannot be construed as forming part of the income chargeable to tax under the head "profits and gains of business or profession". This is as far as the amount deposited in the investment deposit account or the amount invested in the purchase of new machinery or new plant is concerned. In other words, the source of the amount for deposit or for the purchase of the new machinery should come from income chargeable to tax under the head profits and gains of business. But the definition of "eligible business or profession" is in a sense wide. Except those business specified in cl. (a) and (b) of sub-section (2) of s. 32AB, all other business or profession have to be construed as 11 eligible business". In other words, an eligible business need not necessarily be an industrial undertaking engaged in the manufacture or production of an article. One of the components to be considered for deduction under sub-section (1)(ii) of s. 32AB is the profit of eligible business to the extent of 20 per cent of the same. That profit has to be computed in the manner laid down in sub-section (3) of s. 32AB cited supra. We, therefore, conclude that whatever income is earned by the assessee either from its activity of manufacture or production for sale or from other activities such as dealing in shares and earning profits thereon and receiving income on such shares in the interim period as long as they constituted the same business all will fall under the category of "eligible business". The reason is by definition, eligible business, is not confined to manufacture or production. Moreover interhead and intra-head adjustments are the cardinal features of computation of income. Further in the case of the assessee the accounts have been prepared in accordance with Part II and Part III of the Sixth Schedule to the Companies Act, 1956 as is the mandate in sub-section (3) of s. 32AB. From the published P&L a/c prepared in accordance with Part II and Part III of Sixth Schedule to the Companies Act, it is seen that the income from units of Unit Trust of India and profit or loss on the sale of units were considered before ascertainment of the net profit of the undertaking. From such profit, the adjustments envisaged in sub-section (3) of s. 32AB is to be given effect to. Moreover, these two activities of the assessee have to be construed as forming part of the same business as there is one account for all the funds, which are intertwined and interlaced with each other, and the business is conducted under a common management. There is one P&L a/c and one balance sheet. It is the perception of the activities from the point of view of businessman that is material. It is such perception that is recognised in Part II and Part III of the Sixth Schedule to the Companies Act, wherein miscellaneous incomes and other incomes are designed to enter the profit stream. In s. 32AB(3) or s. 32AB(1)(ii) the expression "chargeable to profits and gains of business" is conspicuous by its absence. Hence the dichotomy as between the income from manufacture and income from units of Unit Trust of India is not warranted in terms of s. 32ABM of the Income Tax Act, or on the ratio laid down by the Supreme Court on Setab Ganj Sugar Mills Ltd. vs. CIT (1961) 41 ITR 272 (SC) , CIT vs. Prithvi Insurance Co. Ltd. (1967) 63 ITR 632 (SC) , Produce Exchange Corpn. Ltd. vs. CIT (1970) 77 ITR 739 (SC) . We hold accordingly. The authorities erred in holding otherwise. As both the activities constituted same business, which is an eligible business, provisions of s. 32A13(3)(b) is not applicable."

On the said finding, the Tribunal issued the following directions to the assessing authority:

"The Income Tax Officer is, therefore, directed to first limit the amount of deposit or the amount utilised in the purchase of new machinery or new plant to the income chargeable under the head "profits and gains of business", under section 32A13(1). Then, for the purpose of working out the deduction, rather more specifically, in computing 20 per cent of the eligible profit, the income from units of Unit Trust of India (dividends and profit or loss on the sale of units) should also be considered along with other income as found in the P&L a/c prepared in accordance with Part II and Part III of the Sixth Schedule to the Companies Act, subject to such adjustments as have been prescribed therein."

It is against these findings of the Tribunal the three questions mentioned above are referred at the instance of the Revenue.

28. The learned counsel appearing for the Revenue submitted that what the assessee received from the Unit Trust of India was dividend, that dividends are assessable under 'other sources', that the heads of income prescribed in s. 14 of the Act are mutually exclusive and that once a particular receipt fans under a particular head of income it cannot be held that it was part of income from another head. The counsel submitted that in the instant case, the dividend income received by the assessee from the Unit Trust of India was returned under the head 'other sources' and that it was assessed also under 'other sources'. On that basis it is contended that the said income cannot be treated as the income from an eligible business within the meaning of s. 32AB(2) of the Act. It is further contended that, since dividend income does not fall under the head 'income from business or profession', the assessing authority and the first appellate authority were justified in excluding the said income.

29. Sri. Sarangan, learned counsel appearing for the assessee, on the other hand, submitted that the assessing authority himself had considered the dealing of the assessee in the purchase and sale of units as business and in fact, had allowed the loss incurred in the said business to be set off against the profits of the business. The counsel further submitted that the department has no case that the dealing in the purchase and sale of units by the assessee, is not in the course of its business or that the said activity is not the business. It is further contended that the only case of the department is that since the dividend income received by the assessee from the Unit Trust of India is assessed under 'other sources', the said income cannot be considered as income from eligible business for the purpose of s. 32AB of the Act. It is stated that the assessee is having only one account for both the manufacture and sale of tyres and the purchase and sale of units and that the income from Unit Trust of India was recognised as an income in the P&L a/c and the business profit was thus ascertained. It is its further case that as far as the assessee is concerned the units are held as stock-in-trade as it is frequently buying and selling the same and there is one common account of funds and management and, therefore, the activities of manufacture and sale of tyres and dealing in the units of the Unit Trust of India cannot be segregated and must be treated as part of the same business.

30. We have considered the matter. Sec. 32AB inserted by the Finance Act, 1986 with effect from 1st April, 1987, sub-ss. (1), (2) and (3) thereof, relevant for the purpose of this case, reads as follows:

"32AB. Investment deposit account.-(1) Subject to the other provisions of this section, where an assessee, whose total income includes income chargeable to tax under the head "Profits and gains of business or profession", has, out of such income,

(a) deposited any amount in an account (hereinafter in this section referred to as deposit account) maintained by him with the Development Bank before the expiry of six months from the end of the previous year or before furnishing the return of his income, whichever is earlier; or

(b) utilised any amount during the previous year for the purchase of any new ship, new aircraft, new machinery or plant, without depositing any amount in the deposit account, under cl. (a), in accordance with, and for the purposes specified in, a scheme (hereinafter in this section referred to as the scheme) to be framed by the Central Government, or if the assessee is carrying on the business of growing and manufacturing tea in India, to be approved in this behalf by the Teal Board, the assessee shall be allowed a deduction (such deduction being allowed 1-1,aicre the loss, if any, brought forward from earlier years is set off under section 72) of-

(i) a sum equal to the amount, or the aggregate of the amounts, so deposited and any amount so utilised., or

(ii) a sum equal to twenty per cent of the profits of eligible business or profession as computed in the accounts of the assessee audited in accordance with sub-section (5), whichever is less.

Provided that where such assessee is a firm, or any A0Ps or any BOI's, the deduction under this section shall not be allowed in the computation of the income of any partner, or as the case may be, any member, of such firm, assessing officer P or B01 (2) For the purposes of this section,-

(i) "eligible business or profession" shall mean business or profession, other than-

(a) the business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule carried on by an industrial undertaking, which is not a small-scale industrial undertaking as defined in s. 80HHA;

(b) the business of leasing or hiring of machinery or plant to an industrial undertaking, other than a small-scale industrial undertaking as defined in s. 80HHA, engaged in the business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule.

(ii) "new ship" or "new aircraft" includes a ship or aircraft which before the date of acquisition by the assessee was used by any other person, if it was not at any time previous to the date of such acquisition owned by any person resident in India;

(iii) "new machinery or plant" includes machinery or plant which before its installation by the assessee was used outside India by any other person, if the following conditions are fulfilled, namely:

(a) such machinery or plant was not, at any time previous to the date of such installation by the assessee, used in India;

(b) such machinery or plant is imported into India from any country outside India; and

(c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee.,

(iv) "Tea Board" means the Tea Board established under section 4 of the Tea Act, 1953 (29 of 1953) (3) The profits of eligible business or profession of an assessee for the purposes of sub-section (1) shall,-

(a) in a case where separate accounts in respect of such eligible business or profession are maintained, be an amount arrived at after deducting an amount equal to the depreciation computed in accordance with the provisions of sub-section (1) of s. 32 from the amounts of profits computed in accordance with the requirements of Parts 11 and III of the Sixth Schedule to the Companies Act, 1956 (1 of 1956), as increased by the aggregate of-

(i) the amount of depreciation;

(ii) the amount of income-tax or payable, and provision therefor;

(iii) the amount of surtax paid or payable under the Companies (Profits) Surtax Act, 1964 (7 of 1964);

(iv) the amounts carried to any reserves, by whatever name called;

(v) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities;

(vi) the amount by way of provision for losses of subsidiary companies., and

(vii) the amount or amounts of dividends paid or proposed, if any debited to the P&L a/c and as reduced by any amount or amounts withdrawn from reserves or provisions, if such amounts are credited to the P&L a/c; and

(b) in a case where such separate accounts are not maintained or are not available, be such amount which bears to the total profits of the business or profession of the assessee after allowing depreciation in accordance with the provisions of sub-section (1) of s. 32, the same proportion as the total sales, turnover or gross receipts of the eligible business or profession bear to the total sales, turnover or gross receipts of the business or profession carried on by the assessee".

In this context, it will be useful to refer to Circular No. 461, dt. 9th July, 1986 V1986) 56 CTR (St.) 1 : (1986) 161 ITR 17 (St.)] issued by the CBDT, New Delhi by way of Explanatory Notes on the provisions relating to direct taxes contained in the Finance Bill, 1986. Paragraph 17 thereof relates to s. 32AB. Under paragraph 17.3 it is stated as follows:

"The new scheme is applicable to all existing types of assessees as also to the professionals and the leasing companies which have not leased out machinery to those industrial undertakings other than a small scale industrial undertaking, engaged in the manufacture or production of articles or things listed in the Eleventh Schedule to the Income Tax Act. In other words, the deduction is admissible to all the assessees who carry on "eligible business or profession", which as per s. 32AB(2) means business or profession other than the business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule (in case it is not a small scale industrial undertaking) and the business of leasing or hiring of machinery or plant to an industrial undertaking other than a small scale industrial undertaking engaged in the business of low priority items as specified in the list in the Eleventh Schedule. It may be clarified that the business of construction is an eligible business for the purposes of this provision".

Paragraph 17.4 of the said Circular which deals with other salient features of the scheme of the investment deposit account, states as follows:

"(a) Under s. 32AB(1), it has been provided that deposits with the Development Bank or the purchase of a new ship, new aircraft, new machinery or plant should be out of income chargeable to tax under the head "Profits and gains of business or profession". However, for arriving at the book profit, a uniform system of accounting is yet to be enforced even in the organised sector. Hence, the term "profit of eligible business or profession" has been defined as per s. 32A13(3) in order to ensure uniformity in determining the profits qualifying for deduction, as also to reduce uncertainty about the interpretation of this term. In terms of s. 32AB(3)(a), it has been provided that the profits of eligible business or profession for the purposes of deduction under these provisions will mean, in a case where separate accounts in respect of such business or profession are maintained, an amount arrived at after deducting an amount equal to the depreciation computed in accordance with the provisions of s. 32(1) of the Income Tax Act from the amount of profits computed in accordance with the requirements of Parts II and III of the Sixth Schedule to the Companies Act, 1956, as increased by an amount equal to the depreciation, if any, debited in the audited P&L a/c. This implies that the profit has to be computed, taking into account only the depreciation for the current year, as admissible under the Income Tax Act. Further, Part II of the Sixth Schedule to the Companies Act lays down the requirements as to P&L a/c. These requirements, as per the provisions of s. 32AB(3) of the Income Tax Act, will be applicable in the cases of corporate as well as non-corporate assessees".

31. As per s. 32AB of the Act, where an assessee, whose total income includes income chargeable to tax under the head "profits and gains of business or profession", has, out of such income, utilised any amount during the previous year for the purchase of new machinery or plant, the assessee shall be allowed a deduction of a sum equal to twenty per cent of the profits of 'eligible business' as computed in the accounts of the assessee audited in accordance with sub-s (5). 'Eligible business', for the purposes of this section, is defined under sub-section (2)(i) to mean business other than (a) the business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule carried on by an industrial undertaking which is not a small scale industrial undertaking as defined in s. 80HHA and, (b) the business of leasing or hiring of machinery or plant to an industrial undertaking other than a small scale industrial undertaking as defined in s. 8011HA, engaged in the business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule. The computation of profits of eligible business for the purpose of sub-section (1) is provided in sub-section (3). From a reading of the provisions of s. 32AB and the circular mentioned above, it would be clear that the benefit of the said section will be available to all business income from whatever sources other than those mentioned in sub-cls. (a) and (b) of cl. (i) of sub-section (2) of the said section. It is relevant to note that sub-section (1) of s. 32AB consists of two parts. One is regarding utilisation of the income from the business. The other is regarding the deduction available on the utilisation of such income. Regarding the utilisation of the income, in order to qualify for deduction under the said sub-section, the utilisation must be from out of the income chargeable to tax under the head "Profits and gains of business or profession". It also provides that the utilisation of such income must be for the purchase of new machinery/plant during the previous year. The said subsection itself contemplates that the total income of an assessee may consist of other income also. When it comes to the deduction part, such a distinction is not seen made. The deduction available under the said sub-section is an amount equal to twenty per cent of the profits of the eligible business. So, what is required for fixing the quantum of deduction is to find out the profits of eligible business from out of the total income. As already stated, by virtue of the definition contained in cl. (i) of sub-section (2) of s. 32AB, 'eligible business' means business other than those provided in sub-cls. (a) and (b) thereof. Admittedly, the activity of purchase and sale of units of the Unit Trust of India does not fall under the said two sub-clauses. Therefore, it has to be held that the business of buying and selling of units of the Unit Trust of India is an eligible business and the profits thereof qualifies for inclusion for determining the quantum of deduction available under the said sub-section. In this context, it is relevant to note that the department has no case that the activity of the assessee- company by way of purchase and sale of units of the Unit Trust of India is not a business activity or that the income by way of dividend or profits on the sale of units is not business income. In fact, the Tribunal has noted in paragraph 39 of the appellate order that "there is no dispute that the business of the assessee falls within the meaning of eligible business. The dispute is only about the computation of profits of such business". In other words, the case of the department is that since dividend income has been returned by the assessee as income from other sources and since the said income was assessed under other sources, the said income, cannot be treated as business income qualifying for inclusion in the profits of eligible business. This contention is raised by the department on the assumption that once the dividend income is excluded from the income chargeable to tax under the head 'income from business', the same can never be treated as business income. This assumption is unfounded. Sec, 28 of the Act specifies different kinds of income chargeable to tax under the head 'profits and gains of business or profession'. Clause (i) of the said section provides that the profits and gains of any business or profession which is carried on by the assessee at any time during the previous year are chargeable to tax under the above head.. But s. 56 of the Act falling under the head 'Income from other sources', cl. (i) of sub-section (2) thereof specifically provides that 'dividends' shall be chargeable to income-tax under the head "Income from other sources". It has to be noted that income chargeable to tax under the head 'income from other sources' is only those income which is not chargeable to income-tax under any of the heads specified in s. 14, items A to E. In other words, if a particular item of income can be included under any of the other heads mentioned in s. 14 of the Act, the same is not liable to be assessed under the head 'income from other sources'. It is so stated in sub-section (1) of s. 56 of the Act. Income falling under the various clauses in sub-section (2) of s. 56 are the exceptions to the above. It is by virtue of the specific provisions contained in sub-section (2) of s. 56 that the assessee had excluded dividend income from the income chargeable to tax under the head 'income from business' and the dividend income was assessed under the head 'income from other sources'. This does not mean that in the case of an assessee who is engaged in the business of buying and selling of units of the Unit Trust of India the dividend income received ceases to have the character of business income. On the other hand, the same will also form part of the business income. Only thing is that because of the specific provisions contained in sub-section (2) of s. 56 of the Act the said income, namely, dividend income, cannot be included in the income chargeable to tax under the head 'income from business', nor can it be assessed as such. As already stated, the relevance of income chargeable to tax under the head 'income from business' comes in only in the context of the utilisation of the income out of the total income of the previous year for the purchase of new machinery/plant. It has no relevance when it comes to the deduction part. There, the only relevance is to 'profits of eligible business'. The expression 'eligible business' is also defined. If the legislative intention, as contended by the department, is to allow deduction of a sum equal to twenty per cent of the income chargeable to tax under the head 'income from business', the legislature could have specifically said so, in which case it was not at all necessary to use the expressions 'profits of eligible business' or to give a definition of 'eligible business'. As already stated by the Tribunal, the expression 'chargeable to profits and gains of business' is conspicuous by its absence in s. 32AB(1)(ii) or in s. 32AB(3). The department has taken a contention based on the provisions of sub-section (3) of s. 32AB that dividend income cannot form part of the profits of eligible business. The Commissioner (Appeals) has also taken the stand that dividend income will not fall in the items of cl. (a) of s. 32AB(3). Sec. 32AB(3) deals with the profits of eligible business. In other words, it provides the mode for arriving at the 'profits of eligible business'. It is only for the said purpose cls. (a) and (b) of the said sub-section provide different modes for arriving at the profits of eligible business. Clause (a) provides the mode for calculation of the profits of eligible business in a case where separate accounts in respect of such eligible business are maintained and cl. (b) provides the mode for calculation of the profits of eligible business in a case where such separate accounts are not maintained or are not available. It has to be noted that while cl. (i) of sub-section (2) of s. 32AB defines "eligible business", sub-section (3) of s. 32AB provides the mode for computation of profits of eligible business for the purposes of cl. (iii) of sub-section (1) of s. 32AB. Sub-section (3) of s. 32AB is attracted only in a case where the assessee's total income consists of income from eligible business as well as non-eligible business. It is only in such a case separation of profits of eligible business from the total profits of the business as contemplated under cl. (b) of sub-section (3) arises. In the instant case, we have already held that the activity of buying and selling of the units of the Unit Trust of India will form part of the eligible business of the assessee and its income by way of dividend and profits arising from the sale of units all will form part of the profits of eligible business. In the instant case, the Tribunal has categorically found that the assessee had maintained only one account for all the funds and that there is one P&L a/c and one balance sheet both in respect of the manufacture and sale of tyres and in respect of purchase and sale of units of the Unit Trust of India. We have extracted earlier in this judgment the reasoning of the Tribunal for allowing the claim for inclusion of the income from dividends in the profits of eligible business for the purpose of cl. (ii) of sub-section (1) of s. 32AB. We find that the above reasoning accords with the view taken by us above. We are in full agreement with the reasoning and conclusion of the Tribunal in that regard.

32. Since the Revenue has raised a specific question as to whether the Tribunal was justified in holding that the assessee's business in the purchase and sale of units and its business in the manufacture and sale of tyres constituted one and the same business and since the Tribunal has referred the question for opinion as directed by this Court in OP No. 2487/94, we will deal with the same also.

33. Before going into the said question it is necessary to see how it was considered by the assessing officer and by the appellate authorities. The assessing officer in the computation of total income under the Act for the year in question treated the entire business of the assessee as one and excluded only the income of Rs. 1,51,89,760 received from the Unit Trust of India. In other words, loss suffered on account of the sale of units, Rs. 22,69,700 and claimed as deduction in the computation of total income was not disallowed. This itself shows that the assessing officer had treated the dealing in purchase and sale of units of the Unit Trust of India as 'business' and that too as part of the same business. The Commissioner (Appeals) also did not have a case that the said activity of the assessee is not business. The only case of the said authority is that in view of the Explanation to s. 73 of the Act, the said activity is a speculation business falling under the head 'Income from business' and consequently the loss arising out of the said business should be considered as speculation loss and that though this is a loss falling under 'business loss' the set off of the said loss has to be allowed only in the year in which the company derived profit from speculation business. He has no case that if the assumption that the said activity is speculation business goes, still the same must be treated as a separate business.

34. The Tribunal, while considering the claim under section 32AB, observed as follows:

"Moreover, these two activities of the assessee have to be construed as forming part of the same business as there is one account for all the funds, which are intertwined and interlaced with each other, and the business is conducted under a common management".

The Tribunal in paragraph 54 of its appellate order again observed that the assessee's business in the purchase and sale of units and its business in the manufacture and sale of tyres constituted one and the same business. The reason for holding so stated by the Tribunal has already been extracted and hence not discussed here.

35. The question as to whether the said two activities constitute one and the same business is relevant in the context of profits of eligible business and set off of losses or depreciation. As already stated, if the assumption that the activity of purchase and sale of unit is 'speculation business' mentioned in Expln. (2) of s. 28 and in the Explanation to s. 73 goes, the fact that they are separate businesses falling under the head 'Profits and gains of business or profession' mentioned in s. 28 of the Act is of no consequence since the income therefrom has to be computed in accordance with the provisions contained in ss. 30 to 43C as specified in s. 29 of the Act. Even if the said two activities of the assessee are treated as two separate businesses, once they fall under the definition of 'eligible business', deduction will be available in respect of the profits of both the activities. Likewise, by virtue of the provisions of s. 70, the loss from one source can be set off against the loss from another source since they fall under the same head of income.

36. The test for determining whether two lines of business constitute the same business came up for consideration before the Supreme Court in the context of s. 24(2) of the Income Tax Act, 1922 as it. stood prior to its amendment in 1955, in CIT vs. Prithvi Insurance Co. Ltd. (1967) 63 ITR 632 (SC) and the Supreme Court at page 637 of the said decision observed thus:

"A fairly adequate test for determining whether the two constitute the same business is furnished by what Rowlatt J. said in Scales vs. George Thompson & Co. Ltd. (1927) 13 Tax Cases 83:

'Was there any interconnection, any interlacing, any interdependence, any unity at all embracing those two businesses?' That interconnection, interlacing, interdependence and unity are furnished in this case by the existence of common management, common business organisation, common administration, common fund and a common place of business".

The Supreme Court again considered the same issue in Produce Exchange Corpn. Ltd. vs. C1T (1970) 77 ITR 739 (SC). There, the question was as to whether the share business and other business carried on by the appellant- company constituted the same business. Applying the test mentioned above, Supreme Court held that there is no doubt that there is a common management of the share and stock business and other lines of business, unit of trading organisation, common employees, common administration, a common fund and a common place of business. The Supreme Court accordingly held that the Tribunal was right in holding that the share business and the other businesses carried on by the appellant- company constituted the same business within the meaning of s. 24(2) as that section stood before it was amended in 1955. The dictum laid down by the Supreme Court in the above two cases were followed by the Supreme Court again in Standard Refinery & distillery Ltd. vs. CIT (1971) 79 1TR 589 (SC) and also in B.R. Ltd. vs. V.P. Gupta, CIT 1978 CTR (SC) 82 : (1978) 113 ITR 647 (SC) . The Tribunal, in the instant case, found as a fact that all the tests laid down by the Supreme Court in the abovementioned decisions are satisfied. We find that the aforesaid finding of the Tribunal that the assessee's business in the purchase and sale of units and its business in the manufacture and sale of tyres constituted one and the same business, is perfectly in tune with the tests laid down by the Supreme Court in that regard.

37. The next question for consideration is as to whether the Tribunal was justified in holding that the buying and selling of units is not a speculation business, that the loss of Rs. 22,69,700 was allowable as a business loss and that it cannot be treated as a speculation business loss. The assessing authority, in the assessment under consideration, had allowed the loss of Rs. 22,69,700 incurred by the assessee on account of the sale of units as business loss to be adjusted against the profits. The Commissioner (Appeals) invoked the power of enhancement and issued notice proposing to disallow the same. According to the Commissioner (Appeals), the loss on sale of units amounting to Rs. 22,69,700 has to be treated as speculation loss in view of the Explanation to s. 73 of the Income Tax Act, 1961. The assessee contended that though the Unit Trust is deemed as a company under the Unit Trust of India Act, 1963 and the income from units as dividend, the units are not shares as per the said Act, that the Unit Trust of India is not a company falling within, the purview of the Companies Act and that the unit holder is not a shareholder. It was also contended that Explanation to s. 73 is only concerned with companies carrying on business in the purchase and sale of shares of other companies and that in the absence of definition of 'shares' in the Income Tax Act, the definition of 'share' in s. 2(46) of the Companies Act applied which means share in the share capital of a company and includes stock except where a distinction between stock and shares is expressed or implied, which is absent in the case of units of the Unit Trust of India. The Commissioner (Appeals) rejected the said contentions stating that the Explanation to s. 73 is only a deeming provision and that the Explanation contemplates treatment of certain companies as companies carrying on speculation business to the extent to which the business consists of the purchase and sale of shares and that this has nothing to do with 'speculative transactions' defined in s. 43(5). Referring to the provisions of s. 32 of the Unit Trust of India Act, the Commissioner (Appeals) observed that though it is not specifically mentioned in the said section that units will be treated as shares, it is implied that the units will also be like shares. He also observed that if the Unit Trust is deemed as a company and the distribution of income is to be considered as dividend for income-tax purpose, there is no reason why units cannot be treated as shares for the purpose of Income Tax Act. The Commissioner (Appeals) also relied on the appellate order passed by him for the year 1986-87 wherein he has held with reference to the Explanation to s. 73 that the income from sale of units is income arising out of speculation business falling under the head 'income from business'. On that basis, the Commissioner (Appeals) held that the loss arising out of the sale of units is a speculation loss and though it is a loss falling under 'business loss', the said loss can be set off only against profit from speculation ' business. In that view, the Commissioner (Appeals) held that the sum of Rs. 22,69,700 has to be considered as speculation loss to be carried forward and directed the assessing authority to treat this loss separately and allow carry forward accordingly. The Tribunal considered the question in the light of the provisions of the Unit Trust of India Act, 1963 as amended in 1985 and observed that the purpose of the Act is to provide for the establishment of a corporation with a view to encouraging savings and investments and participation in the incomes, profits and gains accruing to the corporation from the acquisition, holding, management and disposal of securities. Referring further to the definition clauses and other provisions of the said Act, the Tribunal observed as follows:

"From these definitions it is clear that a unit holder is not a shareholder of the Unit Trust of India. Only the institutions specified in s. 4 can be said to be the contributing institutions. A unit holder is just an investor. He has no right in the management of the Trust. The dividends that are declared by the Unit Trust of India are not at the instance or approval of the unit holder. The unit holder has no say in the affairs of the Trust. Therefore, the unit holder cannot be treated as a shareholder and the units cannot be treated as shares. Hence, the Explanation to s. 73 of the Income Tax Act which concerns with the buying and selling of shares cannot be invoked".

Referring further to the submissions made by the counsel appearing for the Revenue with reference to sub-section (3) of s. 32 of the said Act, the Tribunal observed that it is in relation to the provisions of ss. 193 and 194 of the Income Tax Act, 1961 mentioned in s. 32(2) of the Unit Trust of India Act the provisions of sub-section (3) declares that the income distributed by the Unit Trust should be considered as dividend and it should be treated as a company. It is further observed that the fiction created in s. 32(3)'of the Unit Trust of India Act is limited to the provisions of s. 32(1) and (2) and cannot be extended beyond. The Tribunal further held as follows :

"A share is a bundle of rights and a shareholder is one who can exercise those rights on his own. One of the rights attaching to the shareholders is to participate in the affairs of the company. The right to elect the board of directors and the right to approve the accounts and to vote for the dividend are some of the other rights. No such rights are available to the unit holder, such rights having been perhaps reserved for the initial contributors, such as RBI, LIC of India etc. The Explanation to s. 73 of the Income Tax Act, 1961 arises only when there is transaction in the purchase and sale of shares. Units not being shares, and further as each purchase and each sale was accompanied by physical delivery of units, it cannot be said that the assessee was indulging in speculative transactions when it deals with the purchase and sale of shares."

38. The Revenue canvasses the correctness of the findings of the Tribunal. For deciding the said question, it is necessary to refer to the relevant provisions of the Income Tax Act, 1961, and also the provisions of the Unit Trust of India Act. Income from 'business or profession' is liable to be computed under the provisions of ss. 28 to 41 of the Act. Sec. 28 enumerates different types or categories of income chargeable to tax under the head 'profits and gains of business or profession' and cl. (i) deals with the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year. In this context, ExpIn. 2 to the said section provides that where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as "speculation business") shall be deemed to be distinct and separate from any other business. Sec. 43 gives definitions of certain terms relevant to income from profits and gains of business or profession. Sub-section (5) of the said section defines 11 speculative transactions" as a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. The Explanation and the provisions of s. 43(5) have a relevance in the context of s. 73. Sec. 73 of the Act provides for losses in speculation business. Sub-section (1) of s. 73 provides that any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business. Sub-section (2) provides that where for any assessment year any loss computed in respect of a speculation business has not been wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no income from any other speculation business, shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and it shall be set off against the profits and gains, if any, of any speculation business carried on by him assessable for that assessment year. The Explanation to s. 73 reads as follows..

"Where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads 1nterest on securities", 1ncome from house property", "Capital gains" and 1ncome from other sources" or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares".

The assessing authority, as already stated, has allowed the loss in question to be adjusted against the income chargeable under the head 'business', but the Commissioner (Appeals) disallowed the same and directed the said loss to be carried forward for set off against the income from speculation business of the subsequent years on the ground that the Explanation to s. 73 applied. As per the Explanation, where any part of the business of a company (leaving the other portions) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. So, the question to be considered is as to whether in the instant case, the units issued by the Unit Trust of India are shares and further as to whether Unit Trust of India is a company. In other words, if the units issued by the Unit Trust of India cannot be considered as shares, there is no scope for applicability of the provisions of the Explanation to s. 73. For the said purpose, it is necessary to refer to the provisions of the Unit Trust of India Act itself. The Tribunal has referred to and in fact extracted the relevant portions of the said Act. Sec. 2 of the said Act deals with the definitions. The definitions of "securities", "unit", "unit capital", "unit certificate", "unit holder and "unit scheme" are as follows:

"(i) "securities" means share, debentures, bonds and other stock of any company or other body corporate whether incorporated in India or outside, and securities issued by any local authority in India, or by the Government of, or a local authority, in any such country outside India as may be approved by the Reserve Bank and includes Government security as defined in s. 2 of the Public Debt. Act, 1944 (18 of 1944), but does not include mortgage on immovable property:

(n) "unit" means a unit issued under a unit scheme;

(o) "unit capital" means the aggregate of the face value of the units sold under a unit scheme and outstanding for the time being;

(p) "unit certificate" means a certificate issued to the purchaser of a unit under a unit scheme;

(q) "unit holder" means a person for the time being recognised by the Trust as the holder of a unit certificate under a unit scheme;

(r) "unit scheme" means a scheme made under section 21".

Sec. 32 of the said Act reads as follows:

"32. Income-tax and other taxes.-(1) Notwithstanding anything contained in the Wealth Tax Act, 1957, the Income Tax Act, 1961, the Super Profits Tax Act, 1963, the Companies (Profits) Surtax Act, 1964, or in any other enactment for the time being in force relating to income-tax, super-tax or super profits-tax, surtax or any other tax on income, profits or gains

(a) the Trust shall not be liable to any income-tax, super-tax, super profits tax surtax or any other tax in respect of any income, profits or gains derived by it from any source;

(aa) in the case of an assessee who is not resident in India, being,-

(i) an individual who is an Indian or a person of Indian origin, or

(ii) an HUF, there shall not be included in the total income of such assessee, for the purposes of the Income Tax Act, 1961, any income received by such assessee in the previous year in respect of units acquired by such assessee from the Trust out of funds in a Non-resident (External) Account maintained with any bank in India or by the remittance of funds in foreign exchange in accordance, in either case, with the provisions of the Foreign Exchange Regulation Act, 1973, or any rules or orders made thereunder;

(b) ***** (ba) ***** (Clauses (b) and (ba) omitted) (bb) in the case of an assessee who is not resident in India, being an individual who is an Indian or a person of Indian origin, or an HUF, wealth-tax shall not be payable by the assessee in respect of, and there shall not be included in, the net wealth of the assessee computed under the Wealth Tax Act, 1957, the value of the assets in the form of units acquired from the Trust, out of funds in a Nonresident (External) Account maintained with any bank in India or by the remittance of funds in foreign exchange, in accordance, in either case, with the provisions of the Foreign Exchange Regulation Act, 1973, or any rules or orders made thereunder;

(c) where a contributing institution is liable to be assessed to super profits tax under the Super Profits-tax Act, 1963, or to surtax under the Companies (Profits) Surtax Act, 1964, in respect of its own income, profits or gains and receives any sum from the Trust under this Act in respect of its contribution to the initial capital, such sum as reduced by the amount of any income-tax and super-tax payable in respect thereof shall be excluded from the total income of the said institution in computing its chargeable profits for the purposes of super profits tax, or surtax.

Explanation IIn this sub-section,-

(a) in cl. (aa), the expressions "previous year" and "total income" shall have the meanings, respectively assigned to them in the Income Tax Act, 1961;

(b) in cl. (bb), the expressions "assessee" and "net wealth" shall have the meanings, respectively assigned to them in the Wealth Tax Act, 1957, Explanation IIFor the purposes of sub-ss. (1) and (2),-

Explanation IIFor the purposes of sub-ss. (1) and (2),-

(a) an assessee shall be deemed to be "not resident in India" if he is a nonresident within the meaning of cl. (30) of s. 2 of the Income Tax Act, 1961;

(b) a person shall be deemed to be a person of Indian origin if he or either of his parents or any of his grandparents howsoever high in degree of ascent, whether on the paternal side or on the maternal side, was born in India, as defined in the Government of India Act, 1935, as originally enacted:

(2) Notwithstanding anything contained in s. 193 or s. 194 of the Income Tax Act, 1961-

(a) no deduction of income-tax or super-tax shall be made on any interest or dividend payable to the Trust in respect of any securities or shares owned by it or in which it has full beneficial interest;

(b) no deduction of income-tax shall be made by the Trust from the income distributed by it to a unit holder being an individual; and

(c) where in the case of a unit-holder, being an individual who is not resident in India, the income in respect of units receivable by him from the trust during the financial year-

(i) does not exceed seven thousand rupees, no deduction of income-tax shall be made by the Trust from the income distributed by him;

(ii) exceeds seven thousand rupees, deduction of income-tax shall be made by the Trust from the whole of the income distributed to him at the rate of fifteen per cent of such income.

Provided that no deduction of income-tax shall be made by the Trust, where the units in respect of which income is distributed to-

(i) an individual who is an Indian or a person of Indian origin, or

(ii) an HUF;

not resident in India, have been acquired from the Trust, out of funds in a Nonresident (External) Account maintained with any bank in India or by the remittance of funds in foreign exchange, in accordance, in either case, with the provisions of the Foreign Exchange Regulation Act, 1973 or any rules or orders made thereunder.

(3) Subject to the foregoing sub-sections, for the purposes of the Income Tax Act, 1961,-

(a) any distribution of income received by a unitholder from the Trust shall be deemed to be his income by way of dividends; and

(b) the Trust shall be deemed to be a company".

39. Sec. 4 of the said Act provides that the initial capital of the Trust win be five crores of rupees to be contributed by the RBI, LIC of India, SBI and its subsidiaries and such other institutions, viz., scheduled banks and other financial institutions as may be notified by the Central Government. Only the institutions specified in s. 4 can be said to be the contributing institutions. Sec. 32(1) of the said Act provides that income-tax or any other tax is not payable on the income of the Unit Trust of India and in relation to certain income distributed by it to certain categories of persons. Sub-section (2) declares that the provisions of ss. 193 and 194 of the Income Tax Act, 1961 would not be applicable to the interest or dividend payable by the Unit Trust of India and also the income distributed to the unit holder, who is an individual resident in India. The provision for deduction of tax is made in respect of the income distributed to an individual who is a non-resident in case such distribution exceeds Rs. 7,000 etc. Sub-section (3) of s. 32 starts with 'subject to the foregoing sub-sections'. As per the said sub-section, for the purposes of the Income Tax Act, 1961, any distribution of income received by a unit holder from the Trust shall be deemed to be his income by way of 'dividends' and the Trust shall be deemed to be a 'company'. It is relevant to note that the Unit Trust of India Act does not anywhere say that the unit issued by the Trust must be deemed as a 'share', The question then is by the mere fact that sub-section (3), for the purposes of the Income Tax Act, states that the income received by a unit holder from the Trust shall be deemed to be his income by way of dividends and that the Trust shall be deemed to be a company whether it follows on the above that the unit must also be deemed as a share. This will depend on the construction of the provisions of s. 32 of the Act. 'Unit' is defined to mean a unit issued under a unit scheme. 'Unit capital' is defined to mean the aggregate of the face value of the units sold under a unit scheme and outstanding for the time being. 'Unit certificate' is defined to mean a certificate issued to the purchaser of a unit under a unit scheme. 'Unit holder' is defined to mean a person for the time being recognised by the Trust as the holder of a unit certificate under a unit scheme and 'unit scheme' is defined to mean a scheme made under section 21. From the above it is clear that the Trust issues the units under a scheme to be framed under s 21 of the Act and the amount received by the issue of these units known as 'unit capital' is the funds of the Trust under those schemes. Sec. 32(3) of the Act provides that the income received by a unit holder shall be deemed to be his income by way of dividends. It also provides that the Trust shall be deemed to be a company. At this juncture, for a full understanding of the scope of the provisions of s. 32(3) of the Unit Trust of India Act, it is necessary to refer to the provisions of the Income Tax Act, 1961, regarding dividend. Sec. 2(22) of the Act defines "dividend" as follows:

"2. In this Act, unless the context otherwise requires, (22) "dividend" includes-

(a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company;

(b) any distribution to its shareholders by a company of debentures, debenturestock, or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalised or not;

(c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not;

(d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not;

(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or loan to a shareholder, being a person who has a substantial interest in the company, or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits;

but "dividend" does not include-

(i) a distribution made in accordance with sub-cl. (c) or sub-cl. (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets;

(i-a) a distribution made in accordance with sub-cl. (c) or sub-cl. (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, and before the 1st day of April, 1965;

(ii) any advance or loan made to a shareholder by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company.,

(iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-cl. (e), to the extent to which it is so set off;

Explanation L-The expression "accumulated profits", wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956;

Explanation I-The expression "accumulated profits" in sub-cls. (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-cl. (c) shall include all profits of the company up to the date of liquidation, but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place";

Sec. 8 of the Act deals with dividend income. It reads as follows:

'8. For the purposes of inclusion in the total income of an assessee,-

(a) any dividend declared by a company or distributed or paid by it within the meaning of sub-cl. (a) or sub-cl. (b) or sub-cl. (c) or sub-cl. (d) or sub-cl. (e) of cl. (22) of s. 2 shall be deemed to be the income of the previous year in which it is so declared, distributed or paid, as the case may be;

(b) any interim dividend shall be deemed to be the income of the previous year in which the amount of such dividend is unconditionally made available by the company to the member who is entitled to it."

Sec. 56 of the Act also is relevant in this context. The sub-section (1) and the material portion of sub-section (2) are extracted below:

"56. Income from other sources(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in s. 14, items A to E.

(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes shall be chargeable to income-tax under the head "Income from other sources", namely:

(i) dividends."

Sec. 194 of the Act dealing with dividends excluding the provisos reads as follows :

"194. Dividends.-The principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, shall, before making any payment in cash or before issuing any cheque or warrant in respect of any dividend or before making any distribution or payment to a shareholder, of any dividend within the meaning of sub-cl. (a) or sub-cl. (b) or sub-cl. (c) or sub-cl. (d) or sub-cl. (e) of cl. (22) of s. 2, deduct from the amount of such dividend, income-tax at the rate in force".

A perusal of the definition of 'dividend' in s. 2(22) would make it clear that only distribution by a company of accumulated profits to its shareholders in any of the forms mentioned in cls. (a) to (e) of the said sub-section will alone be dividend. A unit holder of the Unit Trust of India is not a shareholder, for, the Unit Trust of India Act nowhere treats the unit as a share. See. 32(3), which creates a fiction for treating the income from units as dividends and the Trust as a company, does not provide for deeming the unit as a share. In the absence of such a deeming, a unit holder cannot be treated as a shareholder. Consequently, the definition of 'dividend' in s. 2(22) of the Act is not attracted, for, as already stated, dividend means any distribution of profits of a company to a shareholder.

40. Sec. 8 of the Act provides that for the purpose of inclusion in the total income of an assessee, any dividend declared by a company, shall be deemed to be the income of the previous year in which it is so declared. Sec. 8 also provides that any dividend distributed or paid by a company within the meaning of sub-cl. (a) or sub-cl. (b) or sub-cl. (c) or sub-cl. (d) or sub-cl. (e) of cl. (22) of s. 2, shall be deemed to be the income of the previous year in which it is so distributed or paid. As already stated, s. 8 is in two parts. The first part deals with any dividend declared by a company. The second part deals with the income falling within the definition of 'dividend' in s. 2(22) of the Act. By virtue of the fiction created by s. 32(3) of the Unit Trust of India Act deeming the income from units as dividend and the Trust as a company, the first part of s. 8(a) mentioned above is attracted, thereby the income from units received by the unit holder shall be deemed to the income of the previous year in which it is so declared for the purpose of inclusion in the total income of the unit holder.

41. By virtue of the fiction created by s. 32(3) of the Unit Trust of India Act, the income from units is liable to be assessed under the head "other sources" as provided in s. 56.

42. Sec. 194 casts an obligation on the company to deduct from the amount of dividend declared by the said company income-tax at the rates in force. Here also, as in s. 8, the section is in two parts. By the fiction created by s. 32(3) of the Unit Trust of India Act, the Unit Trust is liable to deduct tax on the distribution of income from units in advance. Now if we look to the provisions of s. 32 of the said Act, the purpose of the fiction created by s. 32(3) will be clear. Sec. 32(1) of the said Act provides that the Trust shall not be liable to any income tax or any other tax in respect of any income, profits or gains derived by it from any source. It also provides that in the case of an individual who is an Indian but not a resident in India or in the case of an HUF any income received by such individual in the previous year in respect of units acquired from the Trust remitted in an NRI account with any bank in India, is not liable to be included in the total income of the individual. Sub-section (2) of s. 32, inter alia, provides that notwithstanding anything contained in s. 194 of the Income Tax Act, 1961, no deduction of income-tax shall be made by the Trust from the income distributed by it to a unit holder being an individual and where in the case of a unit holder being an individual who is not a resident in India the income in respect of units receivable by him from the Trust during the financial year does not exceed Rs. 7,000, no deduction of income-tax shall be made by the Unit Trust from the income distributed to him and where it exceeds Rs. 7,000 deduction of income-tax shall be made by the Trust from the whole of the income distributed to him at the rate of 15 per cent of such income. It is for this reason that sub-section (3) of s. 32 starts with the expression "subject to the foregoing sub-sections" and then say "for the purposes of the Income Tax Act, 1961, any distribution of income received by a unit holder from the Trust shall be deemed to be his income by way of dividends and that the Trust shall be deemed to be a company". Thus, it is clear that the fiction created by sub-section (3) of s. 32 is created only for the purposes of assessment of dividend income under the Act and for deduction of tax at source. In other words, the legal fiction created by s. 32(3) of the said Act cannot be carried any further.

43. If the legislative intention was to treat the unit as shares to attract all the incidents attached to the holding of a share in a company, the legislature would have specifically said so, which is evident from cls. (a) and (b) of sub-section (3) of s. 32 of the Unit Trust of India Act. The legislature was very well aware of the consequences of treating a unit as a share. A share, as observed by the Tribunal, is a bundle of rights and a shareholder is one who can exercise those rights on his own. Some of the rights attached to the shareholding are for the shareholder to participate in the affairs of the company, the right to elect the board of directors and the right to approve the accounts and to vote for the dividend. No such rights are conferred on the unit holder. In order to attract the provisions of the Explanation to s. 73 of the Income Tax Act, the assessee must deal in the purchase and sale of shares. Admittedly the assessee was not dealing in shares and was dealing only in units. Since the units are not treated as shares either under the Companies Act or under the Unit Trust of India Act, the fact that the income received by the unit holder from the Trust is deemed to be his income by way of dividends and the Trust is deemed to be a company, will not make it a share. In that view of the matter, it has to be held that the provisions of the Explanation to s. 73 has no application to the instant case and the Tribunal was perfectly justified in holding that the Explanation to s. 73 is not attracted.

44. In this context, it is relevant to note that the Explanation to s. 73 was inserted by the Taxation Laws (Amendment) Act, 1975, with effect from 1st April, 1977, so as to treat the business of purchase and sale of shares by companies, other than investment companies, banking companies or finance companies, as speculative business. The scope and effect of the Explanation was explained by the Board in Circular No. 204 dt. 24th July, 1976 [1978 CTR (Jour) 1 : (1977) 110 ITR (St) 21]. Paragraph 19.2 of the said circular says that the object of this provision is to curb the device sometimes resorted to by business houses controlling groups of companies to manipulate and reduce the taxable income of companies under their control. It is also relevant to note that the Explanation was inserted by the said amending Act on the basis of the recommendations of the Wanchoo Committee. The relevant portion reads:

"A tax avoidance device often resorted to by business houses controlling groups of companies is manipulation of results from dealings in shares of the companies controlled by them. In our opinion, such manipulation in share dealings for the purpose of tax avoidance can be checked effectively if the results of dealings in shares by such companies are treated for tax purposes in a manner analogous to speculation. No doubt, companies whose main business activities centre around investment in shares will have to be left out. Accordingly, we recommend that the results of dealings in shares by companies, other than investment, banking and finance companies, should be treated in a manner analogous to speculation business".

It is also relevant to note that the Explanation introduces a legal fiction, that is to say, the activity of a company in the purchase and sale of shares of other companies, will be treated as speculation business by a legal fiction. The Explanation does not apply to an investment company or a company whose principal business is banking or money lending. From the objects, as stated hereinabove, it is clear that for the application of the said Explanation and to deem the activity of purchase and sale of shares it is necessary that the shares so dealt with must be the shares of other companies. The expression 1 companies' used in that context must mean only companies incorporated under the Indian Companies Act as otherwise there is no question of any 1 shares' being issued by the company. The recommendations in the Wanchoo Committee Report and the object with which the Explanation is inserted make the above position clear. There is no question of any manipulation of results from dealing in shares of companies in the instant case since the Unit Trust of India is a Trust created under the Unit Trust of India Act where there is no scope for controlling its affairs by any companies or manipulation of its results.

45. As already stated, ExpIn. 2 to s. 28 of the Act enacts that where speculation transactions carried on by an assessee are of such a nature as to constitute a business, the business (speculation business) shall be deemed to be distinct and separate from any other business. In such case, s. 73(1) provides that any loss in respect of the speculation business shall not be set off except against profits and gains, if any, of another speculation business. In other words, this loss cannot be set off against profits and gains from any non-speculative transactions. Since we have already held that the Explanation to s. 73 is not applicable to the instant case, the Tribunal was perfectly justified in allowing the loss of Rs. 22,69,700 as a business loss.

46. Question No. 1 referred by the Tribunal in the Supplementary Statement of Case numbered as IT Ref. 43/97 is regarding the correctness of the finding of the Tribunal that the expenditure incurred for the wife of the chairman-cum-managing director of the company for foreign travel is an allowable deduction. In the assessment in question the assessee claimed deduction of a sum of Rs. 1,38,561 being the foreign travel expenses of Mrs. Gurmeet Kaur, wife of the chairman- cum-managing director of the assessee- company in the computation of total income. The assessing officer disallowed the same holding that there is. no nexus with the business. The Commissioner (Appeals) confirmed the said disallowance following the decision of the Gujarat High Court in Bombay Mineral Supply Co. I'vt. Ltd. vs. CIT (1985) 153 ITR 437 (Guj). and the decision of the Madras High Court in CIT vs. T.S. Hajee Moosa & Co. (1986) 51 CTR (Mad) 200 : (1985) 153 ITR 422 (Mad): . The Tribunal in further appeal following the Special Bench decision of the Tribunal in Glaxo Laboratories (India) Ltd. vs. Income Tax Officer (1986) 26 TTJ (Bom) (SB) 214 : (1986) 18 ITD 226 (Bom) (SB), allowed the claim of the assessee. According to the Revenue, Mr. Gurmeet Kaur accompanied her husband Sri Raunaq Singh, chairman- cum-managing director of the company not for any business purposes and, therefore, the said amount cannot be allowed as a business expenditure. On the other hand, the assessee contended that Mrs. Gurmeet Kaur accompanied the chairman- cum-managing director, who was on his business tour for foreign countries, to enable him to discharge his social- cum-business obligations in an effective manner and, therefore, it is a legitimate deduction allowable under section 37 of the Act. The Tribunal, on a consideration of the materials available on record, observed that it is not the case of the Revenue that her going abroad with her husband was for private or personal purposes and that in fact the Income Tax Officer has simply disallowed the expenditure stating that the expenditure was not laid out for the purpose of business. The Tribunal also noted that the Commissioner (Appeals) has sustained the disallowance only on that count. The Tribunal further noted that boarding and lodging expenses were not claimed, that her foreign trip was approved by the board of directors and therefore, the business interest in such trip can be presumed and that otherwise there is no need for the board of directors of the Company to approve her trip if it was only for private or personal purposes. The Tribunal further relied on the observations of the Special Bench of the Tribunal mentioned above and allowed the deduction. In this context, we will refer to the facts of the decision of the Madras High Court in CIT vs. T.S. Hajee Moosa & Co. (supra). In that case, the assessee claimed deduction of the expenses incurred on the wife of the senior partners of the assessee-firm accompanying him on a foreign tour. Admittedly the senior partner was a diabetic patient and the wife was taken for the purpose of attending on him. While considering the said claim, the Madras High Court observed that in order to qualify for allowance under section 37(1) of the Act, the whole of the expenditure must have been solely and exclusively incurred for business purposes and that if there is a dual purpose, then it is obvious that the expenditure would not qualify for allowance, for, it will cease to be wholly and exclusively laid out for business purposes. It further observed that in that case, the partner of the assessee is a diabetic and requires to be looked after and that the expenditure incurred is thus laid out in- part for the advantage, benefit and well being of the partner of the assessee and it is distinct and different from the amount expended for purposes of business or trade. It was further observed that the attention given by the wife of the partner of the assessee, while on tour, would enure to his benefit and advantage, not only when he was engaged in his business activities, but even otherwise as a human being, so that at least in part, the expenditure incurred had been laid out for the advantage and benefit of the partner. Accordingly it was held that in the absence of materials with reference to the securing of advantages, it cannot be presumed that such advantages resulted to the assessee in its business activities as a result of the foreign tour undertaken by the wife of the partner of the assessee which alone would justify the allowance of the expenditure as one appropriately falling under section 37(1) of the Act. For taking the said view, the Madras High Court relied on the decision of the Gujarat High Court in Bombay Minor Supply Co. Pvt. Ltd. vs. CIT (supra). That was also a case where the director of a company keeping indifferent health while undertaking the foreign tour, was accompanied by his wife in the tour. The question arose was as to whether the expenditure incurred on foreign tour of the wife of the director is incurred for purposes of business. The Gujarat High Court observed that "tax collectors do not want to discourage business executives and managing directors from undertaking foreign tours for business purposes nor to deprive them of the company of their wives in such tours, but, for that we do not think that in law, it would be permissible for the Income Tax Officer to allow the expenses incurred for rendering such company, however necessary and enjoyable it may be from the point of view of personal needs of those executives". Relying on the decision of the Supreme Court in State of Madras vs. Coelho (1964) 53 ITR 186 (SC) 4, it held that these are all personal expenses and would not entitle the assessee- company to claim the same as business expenses.

47. But the Tribunal has relied on the decision of the Special Bench of the Tribunal in the case of Glaxo Laboratories (India) Ltd. vs. Income Tax Officer (supra) which distinguished the two decisions referred to above. It is the case of the assessee-company that the wife of the chairman- cum-managing director of the company accompanied him on his business tour and that the accompaniment was for the purpose of enabling him to discharge his social- cum-business obligations in an effective manner. The Special Bench observed that in the modern age, and more so in the western countries, the senior executives are, as a matter of social custom, accompanied by their wives when the visit, though for business purposes, has necessarily some social aspects also. Neither the assessing authority nor the appellate authority has got a case that the foreign tour made by the chairman-cum-managing director is not for any business purposes or that the accompaniment of the wife is not for the purpose of fulfilling the social aspects aforementioned. The authorities below also do not have a case that the accompaniment of the wife of the chairman- cum-managing director did not result in any advantage to the assessee. It is also relevant to note that the board of directors of the company, by resolution, have permitted the same.

48. We had occasion to consider almost. a similar situation in IT Ref. No. 39 of 1995. We have noted that the Tribunal in that case took the view that the wife of the chief executive accompanied in a business travel and that there was no material to show that her travel was for any purpose other than business and that the Tribunal had taken note of the modern trend in which the senior executives are accompanied by their wives on visits for business purposes. Thereafter, we considered the decisions of the Madras and Gujarat High Courts discussed above and distinguished the said decisions. Relying on the factual finding entered by the Tribunal, we held that the dictum laid down by the Madras and Gujarat High Courts did not apply. In these circumstances, we do not find any illegality in the findings entered by the Tribunal which relate to the Question No. 1 in IT Ref. No. 43197.

49. First, we will answer the questions referred to in IT Ref. No. 70 of 1994. We answer Question No. 1 in the negative, i.e., in favour of the Revenue and against the assessee. We answer Question No. 2 in the affirmative, i.e., against the Revenue and in favour of the assessee. We answer Question No. 3 also in the affirmative, i.e., against the Revenue and in favour of the assessee.

50. Now we will answer the questions referred to in IT Ref. No. 43 of 1997. We answer Question No. 1 in the affirmative, i.e., against the Revenue and in favour of the assessee. We answer Question No. 2 in the affirmative, i.e., against the Revenue and in favour of the assessee. We answer Question No. 3 also in the affirmative, i.e., against the Revenue and in favour of the assessee.