1. This assessee's appeal arises out of the order of the CIT(A) against the computation of income as per s. 115J of the IT Act by the AO and confirmed by the CIT(A).
2. The facts of the case are that the assessee has claimed deduction out of the net profit of the year as per its P&L a/c as per Explanation (iv) to s. 115J(1A) of the IT Act the lower of the aggregate of losses of earlier years, which include depreciation and the aggregate of depreciation for those years, which are as under :Asst. yr.
Loss after depreciation Depreciation Rs. Rs.1984-85 2,66,335 2,51,8581985-86 4,40,720 1,37,0541986-87 2,74,415 1,17,5171988-89 48,530 1,76,866 --------- ----------- The AO did not agree with the assessee and he has worked out the deduction lower of the business loss excluding the depreciation and depreciation year-wise at Rs. 2,69,048 as under :Asst. yr.
Business loss Depreciation loss Whichever is less Rs. Rs. Rs.1984-85 14,477 2,51,858 14,4771985-86 3,03,666 1,37,054 1,37,0541986-87 1,56,858 1,17,517 1,17,5171987-88 - - -1988-89 - 48,724 - --------- The assessee appealed to the CIT(A) relying upon the decision of this Bench of the Tribunal in ITA No. 2892/Mad/1989 in the case of Buttwelded Tools (P) Ltd. vs. Asstt. CIT (1991) 39 ITD 432 (Mad) (SMC), wherein it was held that 'while computing taxable profits under s.
115J, the Asstt. CIT has to take the least of net loss which includes depreciation as per P&L a/c and depreciation provided in P&L a/c in each of the years in which losses were incurred by the assessee. The learned CIT(A) rejected the argument of the assessee in a cryptic manner without appreciating the decision cited before him and without passing a speaking order. The assessee has now come in appeal before us.
3. The assessee's authorised representative before us argued that the CIT(A) has not understood the aforesaid decision of this Bench of the Tribunal and has dismissed the appeal arbitrarily without looking into the merits of the case. The Tribunal has specifically mentioned in the aforesaid case that the word 'loss' means loss including the depreciation. In this regard he also relied on the recent decision of the Madhya Pradesh High Court in the case of Krishna Oil Extraction Ltd. vs. CIT (1998) 230 ITR 806 (MP). The Departmental Representative relied on the decision of the Andhra Pradesh High Court in the case of V. V. Trans.-Investments (P) Ltd. vs. CIT (1994) 207 ITR 508 (AP).
4. We have considered the rival submissions and perused the records. We would like to refer to s. 115J(IA), Expln. (iv), which is reproduced as under : "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-s.
(1) of s. 205 of the Companies Act, 1956 (1 of 1956) are applicable." Sec. 205(1), cl. (b) of the first proviso to the Companies Act lays down as under : "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-s. (2) or against both." Clause (2) to s. 205 deals with the provision for depreciation for the purpose of s. 205(1) of the Companies Act, 1956. On a reading of these provisions it is abundantly clear that cl. (b) of the first proviso of sub-s. (1) of s. 205 of the Companies Act has been fictionally incorporated in the IT Act, due to which the book profit has to be worked out under s. 115J in accordance with cl. (b) of the first proviso to s. 205(1) of the Companies Act. In terms of cl. (b) of the first proviso to s. 205(1) of the Companies Act 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 oil years, arrived at in both the cases after providing for depreciation in accordance with the provisions of sub-s. (2) or against both. Sub-s.
(2) of s. 205 of the Companies Act states how depreciation has to be worked out.
5. Sec. 115J, Expln. (iv) has incorporated the provisions of s. 205(1) of the Companies Act, 1956. Therefore, the meaning given to the terms 'loss' or 'depreciation' under the Companies Act shall be applied to the IT Act, 1961, The word 'loss' in proviso (b) to s. 205(1) would include depreciation. If the depreciation is to be excluded the legislature would have used the term 'cash loss'. In this regard reference is invited to s. 3(o) of the Sick Industrial Companies (Special) Provisions Act, 1985, wherein a distinction is made between 'accumulated loss' and 'cash loss'. We may also refer in this regard to the case Garden Silk Weaving Factory vs. CIT (1991) 189 ITR 512 (SC), in which the Hon'ble Supreme Court while interpreting the meaning of the word 'loss' has taken the following view : "Unabsorbed depreciation is indeed a part of the 'loss'. This is so because, in the first place, depreciation is a normal outgoing, though in a sense notional, which has to be debited in the computation of the profits of a business on commercial principles (quite apart from the statute) and it is difficult to say why, when such deduction yields a negative figure of profits, it cannot be a 'loss' as generally understood". The Institute of Chartered Accountants of India's Ex-pert Advisory Committee has also published its opinion in respect of the loss in the Chartered Accountant July, 1991, issue at p. 68 as under : "It may be noted that the term 'profit' or 'loss' used in the Companies Act denote 'profit after depreciation' and 'loss after depreciation' respectively. A true and fair view of the profit or loss of a company can be ascertained only after providing for depreciation, Hence the term 'loss' referred to in sub-cl. (b) to s. 205(1) of the Companies Act, 1956 means 'loss after providing for depreciation'". The Madhya Pradesh High Court has also in its latest judgment in the case of Krishna Oil Extraction Ltd., cited supra, relied on by the assessee's authorised representative, has also taken the view that the loss and depreciation have to be worked out in terms of the Companies Act and then set off has to be given to either of the two, whichever is less. Therefore, depreciation and loss have to be worked out iii terms of the Companies Act under s. 205(1)(b) of first proviso of the Companies Act and not in accordance with the IT Act, 1961. The Hon'ble Madhya Pradesh High Court has dissented in this judgment with the judgment of the Andhra Pradesh High Court in the case of V. V. Trans.-Investments (P) Ltd. cited supra. This Bench of the Tribunal (SMC) in the case of Buttwelded Tools (P) Ltd. (supra) has also taken the view that the loss under this section was to be interpreted as loss including depreciation and it has to be considered vis-a-vis depreciation and the least of the two should be deducted from the profits of the relevant year. We, therefore, following the judgment of the Hon'ble Madhya Pradesh High Court, hold that the computation of the book profit under s. 115J by applying Expln. (iv) shall be in accordance with cl. (b) of s. 205(1) of the Companies Act, 1956, and the loss for the purpose of s. 115J will include the unabsorbed depreciation. We hold so because it has been held by the apex Court that if there are two views possible, the view favourable to the subject should be taken. We, therefore, cancel the order of the CIT(A) and direct the AO that the loss should be taken after including the depreciation and then rework out the profit in accordance with s. 115J and thereby allowed deduction out of the profit as per P&L a/e lower of the loss inclusive of depreciation or depreciation whichever is less.