Companies — Minimum Alternate Tax — In respect of company consistently following the practice of debiting the depreciation at the rates prescribed by the Income-tax Rules, the Assessing Officer cannot for the purposes of S. 115J rework the net profit by s

[Malayala Manorama Co. Ltd. v. CIT, (2008) 300 ITR 251
(SC)]

The main question which had arisen for consideration before
the High Court was whether in respect of a company consistently charging
depreciation in its books of account at the rates prescribed in the Income-tax
Rules, the Income-tax Officer has jurisdiction u/s.115J of the Income-tax Act,
1961, to rework net profit by substituting the rates prescribed in Schedule XIV
to the Companies Act, 1956 ? The Kerala High Court (253 ITR 378) had held that
for the purposes of S. 115J the depreciation must be calculated in terms of the
Companies Act. On an appeal to the Supreme Court, it was submitted on behalf of
the appellant that in the profit and loss account the assessee has debited
depreciation at the rates prescribed by the Income-tax Rules, 1962. This has
been the consistent practice of the assessee throughout. S. 211(2) of the 1956
Act mandates that every profit and loss account of a company shall give a true
and fair view of the profit or loss of the company for the financial year and
shall comply with the requirements of Parts II and III of Schedule VI so far as
they are applicable thereto. The accounts of the assessee for the relevant A.Ys.
1988-89 and 1989-90 are audited u/s.227 of the 1956 Act. The audit report
confirms that the accounts of the assessee represent a true and fair view. The
accounts have further been passed and approved by the general body of
shareholders at the annual general meeting. The said accounts have been filed
with the Registrar of Companies and no objections have been raised in relation
to them. It was further submitted that u/s.115J the assessee has the obligation
to prepare his profit and loss account as per Parts II and III of Schedule VI to
the 1956 Act. No dispute has been raised at any stage of the proceedings by the
Revenue that the profit and loss account of the assessee is not in compliance
with the provisions of the 1956 Act, particularly Schedule VI, Parts II and III.
In Schedule VI, there is no reference to S. 205 and S. 350 or Schedule XIV to
the 1956 Act. The appellant referred to Note 3(iv) of Part II (Requirements as
to profit and loss account) of Schedule VI to the 1956 Act which reads as
under : “(iv) The amount provided for depreciation, renewals or diminution in
value of fixed assets. If such provision is not made by means of a depreciation
charge, the method adopted for making such provision. If no provision is made
for depreciation, the fact that no provision has been made shall be stated and
the quantum of arrears of depreciation computed in accordance with S. 205(2) of
the Act shall be disclosed by way of a note”. It was submitted that this made it
clear that Schedule VI to the 1956 Act does not create any obligation on a
company to provide for any depreciation much less provides for depreciation as
per Schedule XIV to the Act. It was also submitted by the appellant that it is a
long-standing accepted position by the Company Law Department that the rates of
depreciation prescribed in Schedule XIV are the minimum rates (See : Circular
No. 2 of 1989, dated Mach 7, 1989). Paragraph (3) of the said Circular reads as
under :