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Thread: Taxation - Volume - 11 - Query No.- 2.1 - Computation of ‘loss’ for the purpose of Section 115J of the Income-tax Act

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    BARE ACT
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    Thumbs up Taxation - Volume - 11 - Query No.- 2.1 - Computation of ‘loss’ for the purpose of Section 115J of the Income-tax Act

    2.1 - Query


    volume - 11

    Computation of ‘loss’ for the purpose of Section 115J of the Income-tax Act.

    1. According to the querist, there is an anomaly in interpreting clause (b) of the first proviso to sub-section (1) of section 205 of the Companies Act, 1956, while calculating the book profits under section 115J of the Income-tax Act. Clause (iv) of ‘Explanation’ to sub-section (1A) of section115J states 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 clause (b) of the first proviso to sub-section (1) of section 205 of the Companies Act, 1956 (1 of 1956), are applicable”.

    2. Clause (b) of the first proviso to sub-section (1) of section 205 provides that if a company has incurred any loss in any previous financial year or years falling after the commencement of the Companies Amendment Act, 1960, then, the lower of the following two amounts, namely:

    a) the amount of loss, or

    b) an amount which is equal to the amount provided for depreciation for that year or those years,

    should be set off against the profits of the company for the year for which the dividends are proposed to be declared or paid.

    3. The querist has also stated that the example given in paragraph 36.5 of Circular No. 495, dated 22nd September, 1987, being explanatory notes to Finance Act, 1987, has been worked out to mean that the “Loss” to be taken for comparing with depreciation is the loss before depreciation (i.e., cash loss). However, according to the querist, clause (b) of the first proviso to sub-section (1) of section 205 of the Companies Act is to be interpreted as per the meaning assigned to it under that Act, and not as per the circular issued under the Income-tax Act. According to the querist, clause (b) of first proviso to sub-section (1) of section 205 makes it clear that arrears of depreciation must be fully written off, before declaring dividends.

    4. The querist has also stated that C.R. DATTA in his book on Company Law (4th Edition), at page 429, has stated as follows:

    “The cumulative effect: Depreciation for the current year, for the years in which depreciation was provided and the company suffered losses, and for the years in which no depreciation was provided, should be set off against profits of subsequent years before declaration of dividend. Profits must absorb the current and past depreciation before declaration of dividend.”

    5. Dr. Kamal Gupta, Technical Director of the Institute of chartered Accountants of India, in his book on “Depreciation in Company Accounts”, explains the provisions in this regard at pages 27 and 28 whereat he mentions that the past losses (after depreciation) and depreciation should be compared and the lower of the two should be considered for set-off against the profits before declaration of dividend. He has also mentioned at page 28 that “the proviso requires setting-off of past losses insofar as such losses are attributable to depreciation, against the profits”. In the examples given, Dr. Kamal Gupta compares only losses after depreciation and depreciation for set-off under clause (b) of the first proviso to section 205(1). In section 115J of the Income-tax Act it is stated beyond doubt that what is required to be set off is the loss or the amount of depreciation which would be required to be set off against the profit of the relevant previous year applying the provisions of clause (b) of the first proviso to sub-section (1) of section 205 of the Companies Act, 1956.

    6. The querist has sought the opinion of the Expert Advisory Committee on the following issue:

    “Whether the loss referred to under clause (iv) of Explanation to sub-section (1A) of section115J of the Income-tax Act is the loss after providing for depreciation or is the loss before providing for depreciation.”




    Opinion



    December 13, 1990

    1. The Committee is of the view that the terms ‘profit’ and ‘loss’ used in Companies Act denote ‘profit after depreciation’ and ‘loss after depreciation’, respectively. The true and fair view of the ‘profit’ or ‘loss’ of a company can be ascertained only after providing for depreciation.

    2. The Committee is also of the view that if for purposes of clause (b) of the first proviso to sub-section (1) of section 205, the term ‘loss’ is taken to mean ‘loss before depreciation’, than the depreciation for the previous financial years may not get set off against the profits of the company before it declares dividend as is clear from the following two situations:

    Loss before depreciation Depreciation Loss after depreciation

    (i) NIL 5000 5000

    (ii) 1000 5000 6000

    3. The Committee is of the opinion that the ‘loss’ referred to in clause (b) of the first proviso to sub-section (1) of section 205, for the purposes of section 115J, means ‘loss after providing for depreciation’.
    Last edited by BARE ACT; 18-08-2010 at 10:05 AM.

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