4.5 Query
Definition of the term “Capital Employed” for the purpose of Section 80-J of the Income-tax Act. 1. Following a decision of the Calcutta High Court in the case of Century Enka Vs. I.T.O.(1977) 107 I.T.R. 123, a company claimed relief of Rs. 232 lakhs under Section 80J of the Income–tax Act as shown below for five assessment years at 6 per cent of the capital employed computed on the basis of total original cost of its assets:
2. However, following the amendment of Section 80J by the Finance Act (No. 2) 1980 with retrospective effect from 1.4.1972, the Income-tax Officer restricted the claim by computing capital employed on the basis of the written down values of the assets reduced by all liabilities of the company for the respective years. The relief allowed by the ITO for the first three years, the assessment in respect of which have been completed, is as follows:
The company has appealed against these assessments.
3. The assessments in respect of assessment years 1979-80 and 1980-81 are pending. However, for making a provisional assessment under Section 197(3) of the Income-tax Act, for arriving at the amount of dividends exempt under Section 80K of the Act in the hands of the shareholders of the company, the ITO computed the total relief under Section 80J for the five assessment years as follows:
4. As a result of this, it appears that the sum of Rs. 204 lakhs would be disallowed by the ITO out of the company’s claim of Rs. 232 lakhs. 5. It is considered by the company, that in view of various allowances (e.g. unabsorbed depreciation, investment allowance and development rebate) available to the company, up to the assessment year 1982-83, the company would not have any liability for Income-tax and hence would not be required to create any provision for tax in its accounts. However, for the assessement year 1983-84, it may need to make a provision for income-tax in the accounts as the rebates, allowances, etc. may not be sufficient to absorb the projected income for the year unless relief to the tune of approximately Rs. 100 lakhs under Section 80J is available to the company. 6. The following specific points are raised for the opinion of the Committee:
(1) Is it obligatory for the company to make provision for taxation restricting the relief under Section 80J to Rs. 28 lakhs only, disregarding its own claim of Rs. 232 lakhs?
(2) If it is not obligatory, would the auditors be justified in insisting that a provision for taxation on the above lines be made as a prudent accounting measure?
(3) Would it be deemed to be an adequate disclosure if the company made a mention of this fact in the notes forming part of the balance sheet, or is even such a note not necessary? (4) What is the position as regards the company’s liability to pay advance tax under Section 211(1) of the Income-tax Act,1961? If the view is that there is no need for a tax provision, it would also follow that there is no liability for advance payment of tax. Opinion October 19, 1981 (1) In the opinion of the Committee, it is obligatory on the company to make provision for taxation restricting the relief under Section 80J to the amount computed in accordance with the law as it stands at the time when the accounts are being finalised. Since the dates on which the respective assessments for the first three assessment years in question were completed have not been stated by the querist, and the total relief determined by the Income-tax Officer for these years amounts to Rs. 23 lakhs according to the Assessment Order, as compared to Rs. 21 lakhs as per the provisional assessment order under Section 197(3) dated 6.12.1980 ; it is not clear from the query as to what is the correct figure of the amount so computed for the five years in question. However, it would appear that, in any event, in view of the amendment of Section 80J by the Finance Act (No. 2), 1980, with retrospective effect from 1-4-1972, the Income-tax Officer has acted in accordance with the law in adopting the written down value as the basis for allowing the relief under Section 80 J. (2) Irrespective of whether it is obligatory or not on the part of the company to restrict the relief as aforesaid, in view of para 9.10 of the Statement on Auditing Practices issued by the Institute, the auditor should advise that adequate provision be made by the company for taxation, having regard to the amended provisions of Section 80J of the Income-tax Act, 1961. (3) In case the company does not follow the auditor’s advice, the auditor will have to qualify his report, as indicated in para 9.10 of the Statement on Auditing Practices mentioned above. (4) Mentioning of the fact of dispute in regard to the quantum of the liability in respect of taxation arising out of the above facts in the notes to the balance sheet by itself would not be enough so far as the auditor’s duties are concerned and the auditor should in that event, qualify his report, either by a reference to the note, or in some other appropriate manner. (5) In view of Rule 3 of the Expert Advisory Service Rules, the Committee did not express an opinion on the fourth query raised by the querist.
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