B. R. Gavai, J. - The Appeal is admitted on the following two substantial questions of law :
"(A) |
|
Whether on the facts and in the circumstances of the case, the ITAT as also the CIT(A) have erred in holding that accumulated profits is required to be determined after considering depreciation under the Income Tax Act and not under the Companies Act, 1956 ? |
(B) |
|
Whether on the facts and in the circumstances of the case, the ITAT erred in not applying the ratio of the Judgment in the case of CIT v. P.K. Badiani [1976] 105 ITR 642 (SC), holding that accumulated profits means profits in the commercial sense and not assessible or taxable profit liable to be taxed as income under Income Tax Act ?" |
2. Smt. Desai, learned Counsel appearing for the Appellant, submits that the learned CIT Appeals as well as the learned Tribunal have failed to take into consideration that while computing the taxable income, the authorities have taken into consideration the depreciation as provided under the Companies Act and not as per the Income Tax Act. Learned Counsel further submits that the profits and losses of an Assessee are determined by the accounts maintained by the Assessee which is a Company in the present case. She further submits that while arriving at a taxable income, the authorities ought to have taken into consideration the percentage of depreciation as provided under the Companies Act. Learned Counsel further submits that the Apex Court in the Judgment in the case P.K. Badiani v. CIT [1976] 105 ITR 642, has laid down a distinction between "profits in the commercial sense" and "profits as under the provisions of the Income Tax Act". The learned Counsel therefore submits that the impugned Orders deserve to be set aside and the Order passed by the Assessing Officer needs to be reviewed.
3. The CIT(A) while considering the submissions on behalf of the Revenue, has found that while considering a taxable income of an Assessee, the Assessee is entitled to the depreciation as provided under the Income Tax Act. It has been found that while considering a case of an Assessee for assessment, it will be governed by the provisions as contained under the Income Tax Act. In so far as the Judgment in the case of P. K. Badiani (supra), is concerned, the question before the Apex Court was as to what would amount to accumulated profits. In the said case, the question that arose for consideration was as to whether the development rebate reserve created by the Company by charging the amount to the profit and loss account would be entitled to a deduction under the provisions of Section 2(6A) of the Income Tax Act. The Apex Court held that unless the accumulated profit is capitalised in some form or the other, mere transfer of the profits to any reserve account will not take away the character of such an amount from the ambit of accumulated profits. It has been held that profits carried to reserve do not cease to be profits unless and until they are effectually capitalised. In the facts of the said case, the Apex Court found that though the part of the profit was transferred to the development rebate reserve account, the same was not capitalised by the Company and, as such, could not be taken away from the ambit of the definition "accumulated profits".
4. The question that arises for consideration before this Court is somewhat different. The question that arises for consideration is as to whether the Assessee is entitled to claim depreciation while computing its taxable income as provided under the Income Tax Act or as provided under the Companies Act.
5. The law is no more res-integra. Various Judgments including the ones in the case of Star Chemicals (P.) Ltd. v. CIT [1993] 203 ITR 11/[1994] 72 Taxman 279 (Bom) and CIT v. Jamnadas Khimji Kothari [1973] 92 ITR 105 (Bom), have held that the depreciation arising from the wear and tear of the business assets is a first charge on profits, without deducting which it is not possible to arrive at a profit in a year. It was held that the normal depreciation as provided under the Income Tax Act and not as per the one provided in the books of account, has to be taken into consideration while computing the Income Tax of an Assessee. In that view of the matter, it is a settled law that while assessing income, the Assessing Authority is required to take into consideration the depreciation as provided under the Income Tax Act and not as provided under the Companies Act.
6. In that view of the matter, we hold that the ratio of the Judgment in the case of P.K. Badiani (supra), will not be applicable to the facts of the present case. The Appeal is, therefore, dismissed with no further orders as to costs.