The I-T Act and the companies law have independent provisions that treat the same issue for instance, depreciation differently.
There are different streams of accounting provided under the Income-Tax Act, 1961 and the Companies Act, 1956. It is legally recognised that there can be several parallel streams of accounting, each independently following its own accounting and legal parameters prescribed by the governing statute.
The Companies Act prescribes rates of depreciation which are lower than those set by the Income-Tax rules. For compliance with the Companies Act, corporates are required to claim depreciation at the rates prescribed under this Act.
A company will not have any option in the matter. The written-down value will be reflected year after year in conformity with the rates of depreciation claimed under the Companies Act.
For all obligations under the Companies Act, it is such rates of depreciation and the resultant written-down values that would have to be recognised.
Under the income-tax law, the depreciation schedule would reflect the depreciation allowable as per the rates prescribed under the Income-Tax Rules and the written-down value year after year would be determined accordingly.
Both these depreciation schedules, under the Companies Act and under the Income-Tax Act, respectively, run parallel, each undergoing change year after year as per its own prescribed Rules with reference to the rate of depreciation allowable under the respective statute.
Computation of tax liability in terms of the provisions of section 115-JB would be an example of another parallel stream.
Computation of income (as affected by the rate of depreciation prescribed) would be quantified in a particular manner under the Companies Act, while there will be a parallel computation under the Income-Tax Act (in terms of the depreciation rates prescribed by the Income-Tax Rules).
Each computation would follow its respective statute unaffected by the other. Section 115-JB(3) gives statutory recognition to this general principle by stating that the carry-forward of depreciation and loss under the general provisions of the Act (other than Section 115-JB) will be governed by the relevant sections of the Act Section 32 for depreciation and Section 72 for carry-forward and set-off loss.
Thus, the parallel streams of computation under the normal provisions of the Act and Section 115-JB computation of tax liability are kept separate and independent of each other.
However, while being separate from the other parallel stream, each is based on a continuity of treatment adopted year after year. The governing computation within a particular stream is strictly adhered to every successive year.
On the same principle, Section 115-JB computation must follow the logic of consistency and regularity year after year, unaffected by the parallel computations running under the Companies Act and the normal provisions of the Income-Tax Act.
Reduction made to book loss or book depreciation in any particular year under the Minimum Alternate Tax (MAT) provisions must form a necessary basis for computation of MAT liability for the subsequent year, irrespective of the treatment given under the Companies Act, or for that matter, under the normal provisions of the Income-Tax Act.
This point was considered by the Authority for Advance Rulings in Rashtriya Ispat Nigam Limited case (AAR No.652 of 2004). In this case, the company, which had sustained losses during the earlier years, made a profit of Rs 1,547 crore for the financial year 2003-04.
In its profit and loss account, the company showed aggregate of past losses and unabsorbed depreciation of Rs 4,461crore comprising business loss of Rs 1,755 crore and unabsorbed depreciation of Rs 2,706 crore. The company claimed that under Section 115-JB(2), the profit had to be reduced by the business loss or the unabsorbed depreciation in a manner that was more beneficial to it. Hence, the company did not pay the MAT.
A ruling was sought on this point. The AAR ruled that the company could not reduce the current year's profit in a manner beneficial to it nor could the profits be reduced partly by the business loss and partly by the unabsorbed depreciation.
Further, it could not reduce the current year's profit by the loss in one year and the unabsorbed depreciation in another, as this would amount to a change in the method.
Computation under Section 115-JB, as far as the figures of book loss or book depreciation brought forward from earlier year or years are concerned, must start with the figures of similar computation made in the immediately preceding year.
Starting from any other point would be against the principles of consistency and regularity. This Section does stipulate that computation under the Section should start from accounts prepared under the Companies Act for the relevant previous year, but that is only for the purpose of working out the net profit under Sub-section (2).
Further, given the specific provisions of sub-clause of the Explanation, the net profit so arrived at has to be reduced by the book loss or book depreciation (whichever is less) of the preceding years as per accounts prepared under the Companies Act and as modified by the reduction, if any, made under Section 115-JB for earlier years.
Since the provisions of Section 115-JB treat the book loss before depreciation and the depreciation claim itself as distinct, the accounts prepared under the Companies Act must be modified, wherever necessary, to comply with provisions of Section 115-JB, for computation of the MAT.
In this regard, Justice B. N. Kirpal of the Delhi High Court (as his lordship then was) in National Thermal Power Corporation Ltd. v. Union of India (192 ITR 187) held that Section 115-J, as it stood in the Assessment Year 1987-88, did not make it mandatory for the accounts to be maintained under the provisions of the Companies Act.
Hence, adjustments in accounts wherever necessary should be made for the purpose of complying with the provisions of Section 115-J.
In the light of the aforesaid discussion, the following principles emerge.
A company does not have the option to reduce the current year's profit by the loss brought-forward or unabsorbed depreciation for the purpose of carry-forward under Section 115-JB in its accounts, in a manner different from the manner adopted for determination of "book profit" under Section 115-JB.
A company does not have the discretion to reduce the current year's profit by the loss brought forward or unabsorbed depreciation. The lesser of the two is required to be reduced from the current year's income.
After making the reduction in one year, the company cannot adopt a different method in the subsequent years.
The company cannot reduce the current year's profit partly by the unabsorbed depreciation.
If a company discloses in its books of account the aggregate loss comprising of the tax loss brought forward and the unabsorbed depreciation as a consolidated figure, for the purpose of calculating the book profit under Section 115-JB, it is required to bifurcate such consolidated loss into loss brought forward and unabsorbed depreciation.
It cannot avail itself of the benefit of reduction envisaged under Section 115-JB(2) in a manner different from the one prescribed under the Act so as to be more beneficial to the applicant.
H. P. Ranina
(The author is a Mumbai-based advocate specialising in Direct Tax Laws.)