ORDER
M.K. Chaturvedi, J.M.
1. This appeal by the assessee is directed against the order of the CIT(A)-XVI, New Delhi, and relates to the asst. yr. 1989-90.
2. Briefly the facts :
The assessee-company is engaged in the business of wire-line logging and perforation activities for exploration of oil. During the relevant assessment year it worked for ONGC and Oil India. Originally assessee filed the return of income on 29th December, 1989, declaring therein an income of Rs. 6,54,930 under the provisions of s. 115J of the IT Act, 1961 (hereinafter called the Act). In the computation of income, the assessee reflected business loss including investment allowance and depreciation at Rs. 1,19,40,250.
3. Thereafter on 24th September, 1990, assessee filed a revised return declaring therein a loss of Rs. 1,87,38,960. Reasons for revising the return was stated to be the claim for 100 per cent depreciation on plant and machinery used below the surface of earth. 100 per cent depreciation on plant and machinery comes to Rs. 1,82,59,549. In the original return assessee claimed depreciation at the rate of 33.33 per cent on the down-hole equipments. It was stated that assessee was a mineral oil concern. It was engaged in the production of logs. It was, therefore, entitled to 100 per cent depreciation on down-hole equipments.
4. The AO did not agree with this contention of the assessee. The AO referred depreciation schedule. It was held that 100 per cent depreciation is admissible on plant used in the field operation below ground by mineral oil concerns only. It was found by the AO that the assessee was not producing any oil. It was not engaged in the activity of oil drilling. It was only assisting the oil companies in exploration work. Therefore, AO held that conditions precedent for allowing 100 per cent depreciation were not fulfilled. As such, he restricted the claim of the assessee to 33.33 per cent only.
5. Profit under s. 115J of the Act was determined @ 30 per cent of book profits, which comes to Rs. 6,54,925.
6. Being aggrieved assessee preferred appeal before the CIT(A). The CIT(A) held that depreciation at the higher rate of 100 per cent is admissible. But in regard to the deemed income under s. 115J of the Act, CIT(A) held that book profits as per the accounts approved by AGM for the period under consideration would remain the basis for determination of deemed income under s. 115J. Being aggrieved assessee filed appeal before the Tribunal.
7. Shri Harihar Lal, learned counsel for the assessee, appeared before us. It was vehemently contended that the AO was not correct in determining the deemed income under s. 115J of the Act at Rs. 6,54,925 as per the original P&L a/c. It was submitted that the AO ignored the revised P&L a/c filed by the assessee-company along with its revised return of income. Referring to the revised accounts, Shri Harihar Lal argued that on the basis of income reflected in the revised accounts, there was no book profit. As such, there was no liability under s. 115J.
8. Learned counsel for the assessee referred some precedents to butress the point that when return is revised, it is incumbent on the AO to consider the revised accounts only filed along with the return. He cannot take into consideration the original accounts for determining the basis for computation of deemed income under s. 115J. According to the learned counsel original return needs to be ignored altogether.
9. Our attention was invited on the auditor’s report, wherein it was mentioned that depreciation on plant and machinery used in field operations (below the ground) is to be allowed @ 100 per cent in accordance with the Schedule-XIV of the Companies Act, 1956, instead of 35 per cent wrongly considered in the original accounts.
10. Shri Harihar Lal, took us through the prescription of s. 115J. It was argued that the AO is duty-bound to compute the deemed income as contemplated in the said section on the basis of book profit. The book profit means the net profit as shown in the P&L a/c for the relevant previous year. It was stated that the P&L a/c for the relevant previous year was prepared in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act, 1956. It was, therefore, not open for the AO to tinker with such profit.
11. Shri Sanjay Kumar Jain, learned Departmental Representative appeared before us. It was vehemently contended that the AO has got every right to make adjustment in the book profit in consonance with the scheme of the statute. It was stated that it is open for the AO to examine that whether the P&L a/c is prepared in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act, 1956 or not ? In case he finds some fault in the preparation of the accounts, he can make necessary adjustments.
12. Learned Departmental Representative stated that in the instant case, assessee did not claim depreciation correctly. The claim was not in consonance with the provisions of Companies Act.
13. The provisions in regard to the depreciation in the Company Law were said to be in pari materia with IT Act. In the original return the depreciation was correctly claimed. In the revised return assessee made excessive claim.
14. Learned Departmental Representative pointed out that the AO duly considered the revised return. In the revised accounts, the claim of depreciation was not correctly made. He, therefore, corrected the figure. Incidentally the said figure matches with the original return. Therefore, it cannot be said that the AO did consider only the original return and not the revised return.
15. We have heard the rival submissions in the light of material placed before us and precedents relied upon. Sec. 115J was introduced by the Finance Act, 1987 w.e.f. 1st April, 1988. It is stipulated in the section that if the total income of a company as computed under the provisions of IT Act is less than 30 per cent of the book profit computed under this section, the total income chargeable to tax will be 30 per cent of the book profit as computed.
16. For the purposes of s. 115J, book profit will be the net profit as shown in the P&L a/c prepared in accordance with the provisions of the VIth Schedule to the Companies Act, 1956, after certain adjustments.
17. Sec. 115J, therefore, involves two process. Firstly, the AO has to determine the income of the company under the provisions of the IT Act. Secondly, the book profit is to be worked out in accordance with the Expln. to s. 115J(1) and it is to be seen whether the income determined under the first process is less than 30 per cent of the book profit. Sec. 115J would be invoked if the income determined under the first process is less than 30 per cent of the book profit.
18. The Explanation to sub-s. (1) of s. 115J gives the definition of the “book profit” by incorporating the requirement of s. 205 of the Companies Act in the computation of the book profit. In our opinion, it is open to the AO to examine that whether book profit is computed in accordance with the tenets of law. The amount reflected in the P&L a/c is not sacrosanct.
19. The panoply of s. 115J is erected on the principles of equity. It is an accepted canon of taxation to levy tax on the basis of ability to pay. It was found that as a result of various tax concessions and incentives certain companies were making huge profits and were also declaring substantial dividends. They were managing their affairs in such a way so as to avoid payment of income-tax. To curb this menace to the company, legislature inserted in the statute the provisions of s. 115J on the pattern of AMT (Alternate Minimum Tax) as introduced in the United State of America.
20. If the mistake is palpable on the perusal of records, the AO cannot shut his eyes. It is his duty to see that things are done properly in conformity with requirements of law. If a person claims depreciation at higher rate, AO can correct the errors, and book profit is to be taken on the basis of corrected accounts.
21. We have gone through the reasonings of the CIT(A). We are not inclined to agree with his observations that the basis for determination of deemed income under s. 115J will be the book profits as per the accounts approved by AGM. It is to be added here that if accounts are found riddled with some lacuna, AO is duty-bound to remove that lacuna to find out the correct book profits.
22. In the instant case, we find that the AO pointed out the defects in relation to the rate of depreciation. The CIT(A) accepted the contention of the assessee. The point apropos the allowability of claim was restored by the Tribunal to the AO. Tribunal rendered certain guidelines for deciding the issue. On the touch-stone of such guidelines, AO will decide the correct rate of depreciation. If the claim of the assessee in regard to the rate of depreciation is to be accepted, it will have its reflection on the book profit also. Book profit needs to be adjusted accordingly. The computation of deemed income under s. 115J will, therefore, be on the basis of said adjusted book profit.
23. We, therefore, in the interest of justice, restore this appeal to the file of the AO, with a direction to decide the same in the aforesaid manner. We further direct the AO to provide assessee adequate opportunity of being heard.
24. In the result, the appeal of the assessee stands allowed, for statistical purposes.