Commissioner of Income-tax Vs. Prana Carriers (P) Ltd. and ors. - Court Judgment

Excerpt:
counsels: e. r. indrakumar, for the applicant m. v. javali, g. sarangan, s. parthasarthy e. s. kiregur, for the respondents head note: income tax company--book profit under s. 115j--adjustment of depreciation/loss under clause (iv) of explanation to s. 115j. ratio : while arriving at net profit where the company has incurred loss during the previous financial year, the amount of loss or the amount which is equivalent to the amount provided for depreciation for that year or those years whichever is less shall be given set off against the profits. held : there is a clear distinction between unabsorbed depreciation and business loss. there are two distinct sections dealing with these two items. unabsorbed business loss is carried forward and set off against the assessments of the partners.....orderby the court:these applications are filed by the revenue seeking reference of the question of law arising out of the orders of the tribunal pertaining to various assessment years. as the question of law arising is common one in all these cases they are disposed of by a common judgment.2. in all these cases the respondents are the assesses companies. the assessing officer for the relevant assessment years while computing the total income chargeable to tax had to determine the adjusted book profit for purposes of s. 115j(1) of the income tax act (hereinafter called the 'act'). the assessing officer while doing so had not taken into consideration the amount of the unabsorbed depreciation while determining the loss.3. there was an appeal to the commissioner (appeals) at the instance of.....

Judgment:
ORDER

By the court:

These applications are filed by the Revenue seeking reference of the question of law arising out of the orders of the Tribunal pertaining to various assessment years. As the question of law arising is common one in all these cases they are disposed of by a common judgment.

2. In all these cases the respondents are the assesses companies. The assessing officer for the relevant assessment years while computing the total income chargeable to tax had to determine the adjusted book profit for purposes of s. 115J(1) of the Income Tax Act (hereinafter called the 'Act'). The assessing officer while doing so had not taken into consideration the amount of the unabsorbed depreciation while determining the loss.

3. There was an appeal to the Commissioner (Appeals) at the instance of assessee. Appellate authority held as per cl. (iv) in Explanation to s. 115J, the net loss had to be determined after taking into consideration and including the amount of unabsorbed depreciation.

4. Aggrieved by the said order the Revenue appealed to the Tribunal. The Tribunal heard the case along with other appeals where the same point was involved and a consolidated order was passed on 16th April, 1993, holding that the loss includes the depreciation. On the other hand it was contended by the Revenue that unabsorbed depreciation allowance cannot be said to be business loss. The Revenue relied on the judgment of the Calcutta High Court in the case of Universal Cargo Carriers Inc. v. CIT : [1987]165ITR209(Cal) 5 and distinguished the judgment of the Supreme Court in case of Garden Silk Weaving Factory v. CIT (1991) 94 CTR (SC) 136 .. (1991) 189 IM 512 (SQ) . The Tribunal dismissed the appeal confirming the judgment of the CIT(A). Therefore, the petitions are filed seeking reference to this Court. Accordingly the following question of law is referred :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the word 'loss' appearing in Expln. (iv) to s. 115J(1A), is the net loss including the amount of unabsorbed depreciation T'

5. To appreciate the above question of law, it is relevant to state the facts leading to incorporating of s. 115J in the Act.

6. 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 by the companies of the income. Studies carried out by the CBIDT revealed that while the provision 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 a 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 accounting for a net profit of Rs. 214 crores showed no tax liability. Therefore, s. 80VVA had become otiose. So, 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. 80VVA. With the avowed object of bringing the zero-tax prosperous companies within the taxable net, s. 115J has been enacted.

7. Sec. 115J reads as follows :

'Sec. 115J. Special provision 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 other than a company engaged in the business of generation or distribution of electricity, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the lst day of April, 1988, but before the 1st day of April, 1991 (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.

(1A) Every assessee, being a company, shall for the purposes of this section, 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 (1 of 1956).

Explanation : For the purpose 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 (1A), as increased by if any amount referred to in cls. (a) to (f) is debited or, as the case may be, the amount referred to in cls. (g) and (h) is not credited to the P&L; a/c, and as reduced by ..........

(iv) 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. 8W ',

8. Sec. 115J provides that in case an assessee being a company, though the total income under the Act in respect of the previous year is less than 30 per cent of its book profits, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to 30 per cent of such book profit. Sub-s. (1A) provides that the assessee shall prepare its P&L; a/c for the relevant previous year in accordance with the provisions of Parts 11 and 111 of Schedule V1 to the Companies Act. The Explanation provides meaning of the term 'book profit'. The net profits as shown in the P&L; a/c for the relevant previous year, as increased under cls. (a) to (ha) and as reduced under cls. (i) to (iv) referred to in the Explanation to sub-section (1A), the amount of loss or the amount of depreciation which is required to be set off against the profit of the relevant previous year have to be worked out in accordance with the provisions of s. 205(1), first proviso, cl. (b), of the Companies Act. In other words, in the case of an assessee which is a company, if the total income of the previous year is less than 30 per cent of its book profit, then, the total income of such company shall be deemed to be an amount equivalent to 30 per cent of such book profit, and such income shall be chargeable to tax.

9. It is relevant here to refer s. 205(1)(b) of Companies Act which is as under :

'(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 .........

10. By reading the above provision it is manifest that where the income of assesses company is less than 30 per cent of its book profit, then its total income shall be deemed to be 30 per cent of the book profit which is taxable and the P&L; a/c has to be prepared in accordance with the Parts H and M of Schedule VI of the Companies Act and while arriving at the net profit, where the company has incurred loss in a previous financial year and the amount of loss or the amount which is equivalent to the amount provided for depreciation for that year or those years which is less, shall be set off against profits.

11. Thus, if the total income of the company is less than 30 per cent of its book profits, the total Income shall be deemed to be an amount equal to 30 per cent of such book profit. The company has to first compute the total income in accordance with the Income Tax Act and if the total income is less than 30 per cent of the book profit then it has to prepare a P&L; a/c under sub-section (IA) of s. 115J for the relevant previous year in accordance with Parts H and III of Schedule VI of the Companies Act. The profit so arrived at as per P&L; a/c under the Companies Act shall be adjusted by addition of the various amounts enumerated under cl. (a) to (ha) under Explanation to s. 115J reduced by amounts mentioned under cl. (i) to (iv) enumerated in the Explanation. Clauses to (iii) are not relevant for the purpose of considering the question of this case. The whole controversy is with regard to interpretation of cl. (iv) of s. 115J. 12.

12. According to cl. (iv) of sub-section (1A) to s. 115J the amount of loss or amount of depreciation is required to be sought against the profits of the relevant previous year, as if the cl. (b) or first proviso to sub-section (1) of s. 205 of the Companies Act, 1956 (1 of 1956) are applicable. The said sub-section provides that if the company has incurred any loss in any previous financial year or years then the amount of loss or an amount which is equivalent to the amount provided for depreciation for that year or those years, whichever is less, shall be set off against profits.

13. It is contended by the Revenue that the loss and depreciation both are different and loss does not include depreciation. In assessing the income of the company the loss or depreciation whichever is less is carried over from the previous years shall be set off against the profits. On the other hand it is contended for the assessee that the loss is a very wide connotation and includes the depreciation. Therefore, while considering the giving set off the loss or depreciation, the assessment authority has to take into consideration the loss including the depreciation as a loss and then give set off for the lesser amount among the two i.e. loss = (loss + depreciation) or depreciation, whichever is less. It is further contended that the word 'loss' has been construed and incorporated to include depreciation under the Income Tax Act as well as the Companies Act. So, the same interpretation was followed and given by the Tribunal rightly. So, the same is acceptable.

14. In view of the above contentions the important question that arises for consideration is :

(1) Whether the loss includes depreciation for the purpose of giving set off in a given assessment year in terms of the s. 115J(1A) of Expln. (iv).

15. To appreciate the above contention it is relevant to extract sub-cl. (iv) of sub-section (1A) of s. 115J

'(1A) Every assessee, being a company, shall for the purposes of this section, prepare its P&L; a/c for the relevant previous year in accordance with the

provisions of Parts H and III of Schedule VI to the Companies Act, 1956 (1 of 1956),

XXXXX XXXXX XXXXX

(iv) 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.'

16. Asper above section amount of loss or depreciation which is required to be set off against the profits of the relevant previous year have to be worked out in accordance with the provisions of s. 205(1), first proviso, cl. (b) of the Companies Act. In other words, in the case of an assessee which is a company, if the total income of the previous year is less than 30 per cent of its book profit, then, the total income of such company shall be deemed to be an amount equivalent to 30 per cent of such book profits. Then its total income shall be deemed 30 per cent of the book profits which is taxable. The P&L; a/c is to be prepared in accordance with the Parts I and II of Schedule VI of the Companies Act. While arriving at net profit where the company has incurred loss during the previous financial year, the amount of loss or the amount which is equivalent to the amount provided for depreciation for that year or those years whichever is less shall be given set off against the profits.

17. Now, we have to consider what is the meaning of the word 'loss'. Whether 'loss' includes depreciation or, loss and depreciation are two separate distinct terms.

18. Sec. 32 of the Income Tax Act provides for set off of depreciation resulted in the previous year in a relevant year against the profits to arrive at the income chargeable subject to other deductions under the Act. If the depreciation is unabsorbed in the relevant year, then it will be carried forward to the ensuring assessment year. Earlier there was no time-limit for carrying forward such unabsorbed depreciation from year to year. Now by virtue of cl. (b) of subs. (2) of s. 32 which came into effect from 1st April, 1997, the unabsorbed depreciation cannot be carried forward for more than eight assessment years immediately succeeding the assessment year for which such depreciation was computed.

19. Sec. 72 of the Act deals with carry forward and set off of business losses. In a given assessment year the net result of the computation of profit and gains of business results in loss to the assessee, such loss is not wholly set off against income. So much of the loss as has not been set off be carried forward to the following assessment years, so that it can be adjusted in the following assessment years to give a set off. Sub-s. (3) of s. 72 provides that such business loss cannot be carried forward for more than eight assessment years immediately succeeding the assessment year for which loss was first computed. Thus, the depreciation and the business loss are prescribed in the Act as two distinct entities and the mode of giving set off is also provided. The unabsorbed business loss can be given set off only against the business income, whereas depreciation can be given set off against any income. Therefore, the loss and depreciation are two distinct concepts provided by the Act

20. In CIT v. Srinivasa Sugar Factory : [1988]174ITR178(AP) , the Division Bench of the Andhra Pradesh High Court consisting of Justice BY. Jeevan Reddy as he then was and one of us, Justice Y. Bhaskar Rao, as he'then was, considered the ambit and scope of the term 'loss' and 'depreciation' and pointed out the distinction between them which we refer. The facts of the case are :

'The facts being common to both the references, we shall narrate in brief as stated in R.C. No. 202 of 1983. The assessee is a registered firm. The assessee filed a return for the assessment year 1977-78 declaring an income of Rs. 75,010. In the footnote of the statement, the assesses firm claimed set off of carried forward depreciation of earlier year amounting to Rs. 97,175. The Income Tax Officer did not admit the above claim. On appeal, by the assessee, the Commissioner (Appeals) permitted the setting off of the unabsorbed depreciation of the previous year. Aggrieved by that, the department filed second appeal before the Tribunal. The Tribunal observed that the unabsorbed depreciation of the registered firm for the preceding assessment year allocated to the partners, if not wholly set off in their respective assessments, should be brought back for computation of the total income of the firm in the subsequent years as if it were the firm's unabsorbed depreciation, and thus upheld the order of the Appellate Assistant Commissioner. As there are conflicting views on the question expressed by different High Courts, the following question was referred :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in directing that the unabsorbed depreciation not set off in the partner's respective accounts in the earlier year should be given set off against the income of the assesses firm in the subsequent assessment year ?' '

21. Justice Bhaskar Rao in a separate concurrent judgment after considering CIT v. Madras Wire Products : [1980]123ITR722(Mad) , CIT v. Nagapatinam Import & Export C61pn. : [1979]119ITR444(Mad) and CIT v. Madras Wire Products : [1979]119ITR454(Mad) has pointed out the difference between the unabsorbed depreciation and business loss after considering the various decisions of different High Courts and Supreme Court, as follows :

'Thus, a clear distinction is drawn between unabsorbed depreciation and business loss. There are two distinct sections dealing with these two items. Unabsorbed business loss is carried forward and set off against the assessments of the partners exclusively by virtue of s. 72, and that too, only for a period of eight assessment years immediately succeeding the assessment year for which the loss was first computed. So far as the unabsorbed depreciation is concerned, it is on a different footing. Under s. 32(2) unabsorbed depreciation is to be added to the amount of depreciation allowance of the firm for the subsequent year and deemed to be part of the depreciation of the subsequent year. It can be carried forward indefinitely. Further, s. 75(2) bars only the carrying forward of the losses of the registered firm once they are apportioned among the partners again to the firm back, whereas; there is no such bar as regards the depreciation allowance since s. 32(2) is not subjected to the operation of s. 75, though it is specifically subjected to the operation of ss. 72(2) and 73(3). One more distinction to be noticed is that while the business loss inherently takes within it the feature of outgoings, the depreciation allowance is not an actual outgoing. In this view of the matter, we cannot accede to the contention of learned counsel for the Revenue that the business losses as also the depreciation allowance merit the same and identical treatment, as regards their absorption. '

22. Justice Jeevan Reddy has agreed with the view expressed by Justice Bhaskar Rao in that case.

23. Learned counsel for the assessee contended that the loss included depreciation as per the proviso of the Companies Act and sub-cl. (b) of the proviso to s. 205(1) of the Companies Act which provided for setting off of the business loss or depreciation, whichever is less, against the profits of the company for arriving at the taxable income is incorporated in cl. (iv) of sub-section (1A) of s. 115J as a fiction. Once the word 'as if' are used in the sub-clause for the purpose of incorporation of the provisions of the other Act, to decide what is the scope and ambit of the incorporated provision will apply. Therefore, the loss which includes depreciation as understood under the Companies Act has to be meant when the 'loss' is considered for the purpose of giving business set off.

24. Therefore, the question of law that arises for consideration is

Whether the computation of the income of an assesses company has to be made as per the provisions of the Companies Act to determine the loss (as in s. 205 of the Companies Act) has been incorporated into ExpIn. (iv) of s. 115J of the Income Tax Act or as per the provisions of the Income Tax Act ?

25. Sec. 115J begins with the non obstante clause which means that though total income of the company is not acceptable in the normal circumstance having regard to fiction created in the section that 30 per cent of the book profit is liable to be taxed. Under cl. (iv) to the Explanation, the book profit so prepared shall be reduced by the amount of loss or the amount of depreciation which would be required to be set off against the profits of the relevant previous year as if provisions of s. 205(1) of first proviso to cl. (b) of the Companies Act are applicable. This shows the intention of the legislature to incorporate s. 205(1), first proviso, cl. (b), in s. 115J of the Act. The effect of this legislative method would amount to incorporation by reference to the provisions of Parts-II and III of Schedule 6, s. 205(1), first proviso, cl. (b) of the Companies Act.

26. Now, we shall refer the case laws on the subject.

27. Lord Esher, M.R. has held in Wood's Estate, In re (1886) 31 Ch. D. 607 (CA) which is in the following words at pp. 440 and 449 :

1f a subsequent Act brings into itself a reference, some of the clauses of the former Act, the legal effect of that, as has often been held, is to write those sections into new Act just as if they had been actually in it with a pen, or printed in it, and, the moment you have those clauses in the later Act, we have no occasion to refer to the former Act at all.'

28/29. In Clarke v. Bradlaugh (1881) 8 BD 63 (CA) that (at p. 440 of 49 Comp Cases) Lord Justice Brett construing the effect of interpreting the incorporation of provision of one statute into another statute has observed as follows :

'.there is a rule of construction that, where a statute is incorporated by reference into a second statute, the repeal of the first statute by a third statute does not affect the second.'

30. The Supreme Court in Mahindra and Mahindra Ltd. v. Union of India : [1979]2SCR1038 has considered the scope of s. 55 of the Monopolies and Restrictive Trade Practices Act, 1969. Sec. 55 of the said Act provides that any person aggrieved by the order made by the Central Government in Chapter III or Chapter 1V or as the case may be, of the Commission under s. 13 or s. 37, may, within 60 days from the date of the order prefer an appeal to the Supreme Court on one or more grounds specified under s. 100 of the CPC 1908. It was contended before the Supreme Court that the reference to s. 100 of the CPC under s. 55 of the Monopolies and Restrictive Trade Practices Act amounted to repeal and re-enactment of the former s. 100 and, therefore, the appeal cannot be maintained on the grounds specified in the new s. 100 under substantial law.

31. The Supreme Court affirming the view expressed in the above two judgments of the Ch. D and QBDs held as follows :

'It ignores the distinction between a mere reference to or citation of one statute in another and an incorporation which in effect means bodily lifting a provision of one enactment and making it a part of another. Where there is mere reference to or citation of one enactment in another without incorporation, s. 8(1) applies and the repeal and re-enactment of the provision referred to or cited has the effect set out in that section and the reference to the provision repealed is required to be construed as reference to the provision as reenacted But where a provision of one statute is incorporated in another, the repeal or amendment of the former does not affect the latter. The effect of incorporation is as if the provision incorporated were written out in the incorporating statute and were a part of it. Legislation by incorporation is a common legislative device employed by the legislature, where the legislature for convenience of drafting incorporates provisions from an existing statute by reference to that statute instead of setting out for itself at length the provisions which it desires to adopt. Once the incorporation is made, the provision incorporated becomes an integral part of the statute in which it is transposed and thereafter there is no need to refer to the statute from which the incorporation is made and any subsequent amendment made in it has no effect on the incorporating statute'

32. The apex Court in Bolani Ores Ltd. v. State of Orissa : [1975]2SCR138 , has considered the incorporation of definition of 'motor vehicles' in the Orissa Motor Vehicles Taxation (Amendment) Act, 1943, borrowing the definition of 1 motor vehicle' from the Motor Vehicles Act. The question was subsequent amendment of the Motor Vehicles Act had no effect on the Motor Vehicles Taxation Act. The Supreme Court negatived the said contention and observed as follows :

'If the Orissa Motor Vehicles Taxation (Amendment) Act, 1943, incorporating the definition of 'motor vehicles' referred to the definition of 'motor vehicle' under the Act as then existing, the effect of this legislative method would amount to an incorporation by reference of the provisions of s. 2(18) of the Motor Vehicles Act in s. 2(c) of the Taxation Act. Any subsequent amendment in the Motor Vehicles Act or a total repeal of the Act under a fresh legislation on that topic would not affect the definition of 'motor vehicle' in s. 2(c) of the Taxation Act.'

33. We may refer another decision of the Supreme Court in Omkarlal Nandlal v. State of Rajasthan : AIR1986SC2146 . We may briefly refer to the facts of the case. The assessee is a registered dealer under the Rajasthan Sales-tax Act as well as under the Central Sales-tax Act. He purchased poppy seeds against declarations under Form No. ST 17 furnished to the selling dealers stating that the purchases were for the purpose of resale within the State. Thereafter, the assessee resold the poppy seeds to different buyers at mandis inside the State. The poppy seeds were specific goods in deliverable condition situate in the mandi and property in the seeds accordingly passed to the buyers under contracts in the mandi. The question that was raised was, when an assessee purchases goods from a selling dealer against a declaration in Form No. ST 17 stating that the goods are being purchased by him for resale within the State and he then proceeds to resell the goods and such resale is in the course of inter-State trade or commerce, would such resale be liable to be regarded as a sale not within the State for the purpose of the declaration in Form No. ST 17, merely because it is a sale in the course of inter-State trade or commerce. Subs. (o) of s. 2 of the Rajasthan Sales-tax Act defines sale to mean 'any transfer of property in goods for cash or for deferred payment or for any other valuable consideration.' The second Explanation thereunder says that : 'A transfer of property in goods shall be deemed to have been made within the State if it fulfils the requirements of sub-section (2) of s. 4 of the Central Sales-tax Act, 1956 (Central Act 74 of 1956). ' Sec. 4 of the Central Sales-tax Act reads as follows :

'4. When is a sale or purchase of goods said to take place outside a State.-(1) Subject to the provisions contained in s. 3, when a sale or purchase of goods is determined in accordance with sub-section (2) to take place inside a State, such sale or purchase shall be deemed to have taken place outside all other States.

(2) A sale or purchase of goods shall be deemed to take place inside a State, if the goods are within the State :

(a) in the case of specific or ascertained goods, at the time the contract of sale is made; and .........

34. Considering the scope of ExpIn. II to sub-section (o) of s. 2, it was held that (at p.415) ........... The State legislature could have very well reproduced the entire language of sub-section (2) of s. 4 bodily in Expln 11 to sub-section (o) of s. 2, but it preferred to employ a simpler device by incorporating by reference the provisions of sub-section (2) of s. 4 in ExpIn. II to sub-section (o) of s. (2). The doctrine of incorporation by reference has been succinctly explained by Lord Esher M.R. in Wood's Estate In re (186) 31 Ch. D 607 (CA) in the following words. This Court also explained the doctrine of incorporation by reference in similar terms in Shamrao V. Parulekar v. District Magistrate, Thana, : 1952CriLJ1503 , and observed: 'The rule is that when a subsequent Act amends an earlier one in such a way as to incorporate itself, or a part of itself, into the earlier, then the earlier Act must thereafter be read and construed (except where that would lead to a repugnancy, inconsistency or absurdity) as if the altered words had been written into the earlier Act with pen and ink and the old words scored out so that thereafter there is no need to refer to the amending Act at all.'

35. A Division Bench of Andhra Pradesh High Court [in V.V Trans-Investinents (P) Ltd. v. CIT (1994) 119 CTR (AP) 184 : (1994) 207 1TR 508 (AP) 0Ed.] considering the computation of income and scope of s. 115J while considering whether loss for purpose of s. 115J includes the unabsorbed depreciation or not, after referring the case law on the subject has held as follows :

'Therefore, while construing 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 s. 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.'

And ultimately held that in terms of s. 115J after incorporation of s. 205(1), first proviso, cl. (b) in the section, the unabsorbed depreciation is not part and parcel of business loss.

The Division Bench of Kerala High Court [reference is to CIT v. Apolo Tyres Ltd. (1998) 149 CTR (Kar) 538-Ed.] after considering question No. 1 which reads as follows :

' 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 From the above, it follows 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 Parts 11 and III of Schedule VI of the Companies Act, 1956 as required under s. 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 Schedule XIV to the Companies Act coming into force with effect from 2nd April, 1987, if it is not originally provided in the earlier years 7, has held in favour of Revenue, after considering the entire case law on the subject elaborately.

36. From the above, it follows that the provision of an enactment can be incorporated into another enactment by reference. If such a incorporation is made, it is not necessary to refer to the parent Act from which the provision is borrowed. It is to be interpreted 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(10) 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 requirement to refer to the Companies Act, 1956, at all.

37. The learned counsel for the assessee relied on the following judgments. In Manyappa & Ors. v. State of Kamataka & Ors. AlR 1998 SC 1334 the Supreme Court was considering whether the provisions of the Central Land Acquisition Act, 1894, as amended from time to time will apply where the proceedings are taken under the Karnataka Acquisition of Land for House Sites Act, 1972. Sec. 5 of the State Act stated that the procedure of the Central Act in respect of enquiry and award by the Dy. Commissioner will apply to the acquisitions under that Act. The Supreme Court considering the question whether Central Land Acquisition Act along with amendments made from time to time will apply to the State Act or not and the case law on the subject held that '.

'Firstly there being no detailed machinery whatsoever in the Karnataka Act, 1972, that Act cannot be treated as a self-contained or complete Code. Secondly, the Karnataka Act, 1972 and the Central Act, 1894 (as amended by the Karnataka Act, 1961) are supplemental to each other for unless the Central Act supplements the Karnataka Act, the latter cannot function. Thirdly, these Acts are in pari materia because the Karnataka Act, 1972-unlike the Calcutta Act, 1911, and U.P. Act, 1965-does not deal with any other subject but deals with the same subject of land acquisition which otherwise would have fallen within the ambit of the Central Act, 1894. For the aforesaid reasons, we are of the view that the amendments made in 1984 to the Central Act, 1894 including s. 11A have to be read into the Karnataka Act, 1972, so far as enquiry award, reference to Court, apportionment of amount and the payment of amount in respect of land acquired under the Act.'

The facts of this case are quite different from the facts of the present case. Therefore, the same will not apply.

38. The learned counsel for the assessee relied on the judgment in Kirshna Oil Extraction Ltd. v. CIT : [1998]230ITR806(MP) wherein the Division,Bench of Madhya Pradesh High Court considered the scope of s. 115J and held that loss and depreciation have to be worked out in terms of the Companies Act and whichever is less has to be set off against the profit of the company. In that case the question Nos. 1 & 2 referred were :

'(1) Whether, on the facts and in the circumstances of the case, 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 the Income Tax Act, 1961, means excluding depreciation ?

(2) Whether, on the facts and in the circumstances of the case, the interpretation of the word 'loss' sought to be put on s. 115J of the Income Tax Act, by the Tribunal is correct in law T'

The Division Bench has referred the judgment of the Andhra Pradesh High Court in V. V Trans-Investinents (P) Ltd. vs. C1T : [1994]207ITR508(AP) . The Madhya Pradesh High Court except referring the judgment of the Andhra Pradesh High Court has not given any reasons to differ with the view expressed and except discussing s. 115J and s. 205(1), cl. (b) of the first proviso, of the Companies Act, there is no elaborate discussion and no case law on the subject is considered and by reading only the section itself they have held as supra. The High Court has not considered the Supreme Court judgment referred supra. Therefore, we are not able to agree with the said view.

38.1 The learned counsel for the assessee contended that the application of the fiction has to be understood in broader sense and as per that principle the entire Companies Act has to be deemed incorporated in Expln. (iv) of s. 115J of the Income Tax Act. Appreciating the above contention, it is relevant to notice the decision in Addl. Income Tax Officer & Anr v. E. Alfred (1962) 44 M 442 (SC) 2:

'One E died intestate leaving behind him a son, the respondent and eight daughters. For the assessment year 1946-47, a notice was issued to the respondent under s. 22(2) of the Indian Income Tax Act, 1922, in regard to E's income and he was assessed under s. 24B(2). As after service of a notice of demand the respondent defaulted in payment of the tax, penalties were imposed upon him under s. 46(1). The respondent challenged the levy of penalty and the High Court quashed the orders imposing penalty. On appeal to the Supreme Court held :

Reversing the decision of the High Court, that the penalties could be imposed on the respondent as an assessee and that the orders levying penalties were valid. He was himself an assessee qua the assets and liability to tax of E; he was, therefore, an assessee in default and liable to the imposition of penalty for this default.

The generality of the definition of 'assessee' in s. 2(2) of the Indian Income Tax Act, 1922, is sufficient to include even a legal representative who is to pay the tax, though out of the assets of the deceased person.

By s. 24B(1) of the Indian Income Tax Act, 1922, a legal representative is made liable to pay the tax which might have been assessed but not paid by the deceased person or which might be assessed after his death. It covers all situations and contingencies and makes the liability absolute, limited, however, to the extent to which the estate of the deceased is capable of meeting the charge.

The word 'assessment' bears different meanings, and in one sense it comprehends the entire process of computation and levy of tax. It is in this sense that the legal representative becomes an assessee by the fiction, and this fiction has to be fully worked out to its logical conclusion.

As the legal representative is an assessee by fiction he does not fall within the words 'other person' in s. 29 of the Indian Income Tax Act, 1922.'

Therefore, the facts of that case are quite different. In that case, only question arose whether legal representative will be liable to pay penalty in the place of assessee when the assessee dies. The Supreme Court answering the said question held that as the legal representative is an assessee by fiction he does not fall within the words 'other person' in s. 29 of the Indian Income Tax Act, 1922. Therefore, that decision is not applicable of the facts of this case.

Therefore, we hold that construing the provision of s. 115J of the Income Tax Act, there is no need to refer the provisions of s. 205(1), cl. (b) of the first proviso 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), cl. (b) of the first proviso, of the Companies Act was written out verbatim as s. 115J of the I T Act. Therefore, for interpreting s. 115J in which the provisions of s. 205 of the Companies Act are interpreted, the provisions of Income Tax Act only apply.

39. 'The learned counsel for the assessee contended that Expln. (iv) of s. 115J of the Income Tax Act provided that the loss or 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 (Act 1 of 1956), are applicable. As by fiction, using of the word 'as if' in Expln. (iv) to s. 115(J) of the Income Tax Act by borrowing s. 205 of the Companies Act for the purpose of computation of the income and to determine the loss have to be taken into consideration. As per the provisions of the Companies Act, the loss includes depreciation. Therefore, depreciation is part and parcel of loss, so depreciation cannot be treated as separate from the loss.

In Sher Singh v. Union of India & Ors. : [1984]1SCR464 the question arose was whether an application for renewal of permit under s. 58(2) r/w s. 47(1-H) has to be considered as a fresh application or it has to be given priority as an application for renewal. Sec. 58, cl. (2), provided that a permit for renewal and application made and disposed of as if it was an application for permit. Considering the effect of the word 'as if', the Supreme Court has held :

'The expression 'as if' is used to make one applicable in respect of other. Therefore, the expression 'as if' used in s. 58(2) would mean and imply that the application for renewal must be made in the same manner and to the same extent as an application for a fresh permit and must be processed as such. This would mean that even where an existing permit-holder applies for a renewal of his permit, it has to be advertised and fresh applicants can as well apply for a permit to ply vehicles on the same route for which the previous holder of permit has applied for renewal of his permit. After considering all such applications, other conditions being equal, an existing operator who has applied for renewal will have preference. There ' fore, by necessary interpretation, s. 47(1-H) would also come into play when an application is for renewal of a permit on an inter State route. There is no conflict between s.47(1-H) and s. 58(2).',

The facts of this case are quite different. In that case, by use of the expression 1 as if' in s. 58(2), the application for renewal has to be made in the same manner and to same extent as an application for fresh permit has to be processed as such. Therefore, those provisions are quite different from s. 115J of the Income Tax Act and the same will not apply to the facts of the present case.

In. CIT v. Shakuntala & Ors. : [1961]43ITR352(SC) the question which arises in the present case did not arise at all. Therefore, the said decision is not relevant.

The learned counsel for the assessee contended that subsequent amendment made it clear that s. 115J(IA) provided an Explanation to resolve the doubt which arises under s. 115J, cl. (iv), of the Act. It is contended that as the later amendment specifically provided what is loss, what is depreciation and what is the method of computation and whether the loss would include depreciation on not, it has to be understood that s. 115J does not provide that depreciation and loss are separate and loss does not include depreciation. It should be noted that the provisions of s. 115J(lA) were interpreted by the High Court when there was some doubt to make it very clear, it was explained in the later amendment. Therefore, the subsequent amendment is only clarificatory. By that itself, it cannot be said that Expln. (iv) to s. 115J is not providing to compute the income either excluding the loss or depreciation, whichever is less, and it provides for exclusively of loss, which includes depreciation.

In Thiru Manickam & Co. v. The State of Tamil Nadu AIR 1971 SC 518, the Supreme Court was considering s. 15(b) of the Central Sales-tax Act.The question, whether there was any ambiguity in s. 15(b) of the Central Sales-tax Act regarding the payment of sales-tax There was subsequent amendment in the Central Act by Central Sales-tax (Amendment) Act of 1972 (Act No. 61 of 1972). Considering the later amendment, the Supreme Court held as follows ..

'Assuming that there was some ambiguity in the language of cl. (b) of s. 15, as it existed at the relevant time, the matter is made clear by the amendment made in the Central Act by Central Sales-tax (Amendment) Act, 1972. '

The above proposition squarely applies to the present case. The later Explanation provided in s. 115J(1A) is only clarificatory and makes very clear of what was stated in s. 115J of the Income Tax Act.

In State of Maharashtra & Anr v. Sant Jogmder Singh Krishan Singh & Ors. : [1995]2SCR242 . Justice K. Ramaswamy, speaking for the apex Court, has considered the question when specific provisions of the Central Act are incorporated in the State Act and thereafter there is an amendment to the Central Act, whether the amended provisions of the Central Act will apply to the proceedings under the State Act. The apex Court considering the said question and also considering the contention of the counsel appearing for the appellants in that case, held as follows :

Wherever the legislature intended to apply the specific procedure or the fetters in exercising the power as visualised by the Central Act, it did so specifically. After the Central Act 68 of 1994 has come into force, no attempt was taken by the State legislature to amend the Act introducing or incorporating s. 1 1A of the Central Act as part of the Act. Since the legislature had incorporated specific provisions of the Central Act, the necessary conclusion is that the legislature did not intend to apply the unspecified the provisions of the Central Act to the exercise of power under the Act. In this behalf it is to be remembered that there is a distinction between incorporation and adoption by reference. If the legislature would have merely adopted the Central Act, subsequent amendments to that Act made under Act 68 of 1984 would have become applicable per force.'

In Gaun Shankar Gaur v. State of UP : AIR1994SC169 , the apex Court held that.1n legislation by incorporation, the provisions of the former Act becomes an integral part of the later Act, as if it was written with ink and printed in the latter Act. It is not so in case of adoption by reference. In such a case, when provisions in the former Act are repealed or amended, they cannot, unless expressly made applicable to the subsequent Act, be deemed to be incorporated in it. The later Act is totally unaffected by any amendment or repeal. Whether a case is one of incorporative or reference is to be judged from the scheme, language employed and purpose the statute seeks to achieve. If a later Act merely makes a reference to the earlier Act or existing law, it is only by way of, reference and all amendments subsequently made will have effect, unless its operation is saved by s. 8(1) of the General Clauses Act or it is void under Art. 254 of the Constitution. It was held in that case that s. 55 of the Act read with the Schedule merely incorporated the provisions of the Central Act and so, subsequent amendments to s. 6 of the Central Act did not form part of the Adhiniyam and they have no effect on the provisions of the Adhiniyam. Similar is the position under the Act.'

The distinction between the legislation by incorporation and legislation by adoption is considered in the above stated judgments and they have laid down the principles as stated supra. Applying the above principle, it is clear, if a specific provision is incorporated in the later Act, that provision alone applies and no other provision of the former Act or amended provisions of the former Act will apply.

40. Therefore, in view of the above stated principles we hold that for the computation of income of assesses company the assessing authority has to compute the income as per s. 115J and other relevant provisions of Income Tax Act and the provisions of Companies Act except s. 205(1)(b) will not apply and business loss does not include depreciation. Applying the said method when the income is computed, the loss or depreciation, whichever is less, only can be set off for arriving taxable income apart from other deductions available under Income Tax Act.

41. In view of the above circumstances, we answer the question in favour of the Revenue and against the assessee.