The provisions of Section 205(1), Clause (b) of the first proviso of the Companies Act, which are statutorily incorporated under the Income-tax Act, require that only the loss or depreciation of the current year or years, whichever is less, shall be set off against the profits of the company.

A.K. Mathur, C.J.

1. This is a reference under Section 256(1) of the Income-tax Act, 1961, at the instance of the Revenue and the following questions of law have been referred by the Tribunal for answer of this court :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the prior period depreciation is an allowable deduction while computing book profit under Explanation (iv) to Section 115J of the Income-tax Act, 1961, read with Section 205(l)(b) of the Companies Act, 1956 ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the prior period expenditure should not be excluded from the computation of book profits under Section 115J within the meaning of net profit given in the Explanation below Section 115J(1A) of the Income-tax Act, 1961 ?"

2. The brief facts giving rise to this reference are that the assessee is a private limited company engaged in the manufacturing of oil from oilseeds, etc. A return showing nil income was filed on December 26, 1989. The Assessing Officer while computing the income, proceeded to determine the same under the provisions of Section 115J of the Income-tax Act, 1961. On examination of the accounts of the company, it reveals that it has charged arrears of depreciation at Rs. 13,42,497 to its profit and loss account. The Assessing Officer further noticed that the assessee-com-pany debited expenses of Rs. 3,24,495 under the head "Item pertaining to previous year". The Assessing Officer asked the assessee to show cause as to why the aforesaid two amounts be not excluded from the determination of book profit under Section 115J of the Income-tax Act, 1961. The Assessing Officer, after taking into consideration the various submissions of the assessee, came to the conclusion that it is not entitled to the adjustments of these amounts and, accordingly, he passed the assessment order on February 28, 1990. The Assessing Officer excluded the prior period expenses of Rs. 3,24,495 while computing income under the provisions of Section 115J of the Income-tax Act, 1961. The Assessing Officer also disallowed the assessee's claim for prior period depreciation and added a sum of Rs. 13,42,497 while completing the assessment on February 28, 1990. The income of the assessee-company was determined as at Rs. 5,19,150 under the provisions of Section 115J of the Income-tax Act, 1961.

3. Aggrieved against the order of the Assessing Officer, the assessee went in appeal before the Commissioner of Income-tax (Appeals) and the Commissioner of Income-tax (Appeals) affirmed the order of the Assessing Officer excluding prior period expenses amounting to Rs. 3,24,495 and the rest of the claim of the assessee was rejected.

4. Aggrieved against the order of the Commissioner of Income-tax (Appeals), the assessee approached the Income-tax Appellate Tribunal and the Tribunal reversed the findings of the Assessing Officer as well as that of the Commissioner of Income-tax (Appeals). The Tribunal allowed that the assessee's claim for prior period depreciation under Section 115J(1A) of the Income-tax Act. Thereafter, the Revenue approached the Tribunal for referring the questions of law before this court and, accordingly, the aforesaid questions of law have been referred for answer of this court.

5. We have heard learned counsel for the parties and perused the records.

6. Shri Abhay Sapre, learned counsel for the Revenue, has submitted that the whole idea behind enacting the provision of Section 115J of the Income-tax Act was to check the tendency on the part of the company to show nil book profit ; therefore, the said Section was added so as to check this tendency on the part of the company to work out nil profit. The whole new scheme was enacted so that the company should work out their book profit in the manner provided under Section 115J of the Income-tax Act. Section 115J is a special provision relating to com