I have always charged depreciation in my books at Income Tax Rules rates. Can the Assessing Officer rework my book profit under section 115J using Schedule XIV rates instead?
No. The Supreme Court allowed the company's appeals and set aside the Kerala High Court. Following the three-Judge Bench in Apollo Tyres, it held the controversy was no longer res integra: for section 115J the Assessing Officer may only check that the accounts are certified as properly maintained under the Companies Act, and then make the increases and reductions the Explanation allows. He has no jurisdiction to go behind the net profit shown in the profit and loss account. So where a company has consistently charged depreciation at Income Tax Rules rates in accounts audited, approved in general meeting and filed with the Registrar without objection, the book profit cannot be reworked at Schedule XIV rates.
Decided by the Supreme Court (Supreme Court of India - Ashok Bhan and Dalveer Bhandari, JJ. (judgment per Dalveer Bhandari, J.)) on 2008-04-10, reported as 2008 AIR SCW 3407; (2008) 12 SCC 612; AIR 2008 SC (Supp) 1794; 2008 Tax LR 465; (2008) 300 ITR 251. It bears on section 115J of the Income Tax Act 1961, in Assessment & Scrutiny and How Tax Law Is Read matters.
This is the decision that applied Apollo Tyres to the depreciation question and settled, at least for section 115J, that the book profit is what the company's own certified accounts show. Its supporting points are worth having: Schedule VI, Parts II and III, which is what section 115J(1A) actually incorporates, nowhere requires depreciation at Schedule XIV rates and does not even refer to sections 205 or 350; Note 3(iv) to Part II requires only disclosure of what has been provided; and Company Law Board Circular No.2 of 1989 treats the Schedule XIV rates as minimum rates, with Note 5 to that Schedule contemplating different rates being used and disclosed. But it must be read together with the later reference order in Dynamic Orthopedics, where a two-Judge Bench said this decision needs reconsideration by a larger Bench.
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The appeals were against a common judgment of the Kerala High Court dated 13 November 2001 in Income Tax References Nos.245, 259, 289 and 293 of 1999, covering assessment years 1988-89 and 1989-90. The company had consistently debited depreciation in its profit and loss account at the rates prescribed by the Income Tax Rules, 1962. Its accounts were audited under section 227 of the Companies Act, 1956, the audit report confirmed a true and fair view, the accounts were approved by the shareholders in general meeting and filed with the Registrar of Companies, and no objection was taken to them. For assessment year 1988-89 it had returned a loss of Rs.1,12,293 and claimed a refund of Rs.8,62,730 of prepaid tax; the Deputy Commissioner rejected the returned figures, assessed total income at Rs.47,26,270 and raised a demand of Rs.26,83,327 after credit for advance tax and tax deducted. The Revenue's case, accepted by the High Court, was that section 115J is legislation by incorporation which brings in section 205 of the Companies Act, that section 205 permits depreciation to the extent specified in section 350, and that section 350 requires the Schedule XIV rates - so book profit had to be reworked at those rates. The company relied on Apollo Tyres and on decisions of the Punjab and Haryana, Bombay and Gujarat High Courts following it. The Revenue relied on decisions of the Kerala and Madhya Pradesh High Courts the other way.
The appeals were allowed and the High Court's order set aside, the parties bearing their own costs. The Court held the controversy was no longer res integra because a three-Judge Bench in Apollo Tyres Ltd v. CIT had already interpreted section 115J, and there was no scope for further discussion. On that interpretation the Assessing Officer computing income under section 115J has only the power to examine whether the books of account are certified by the authorities under the Companies Act as properly maintained in accordance with that Act, and thereafter the limited power of making the increases and reductions provided in the Explanation to the section. He does not have jurisdiction to go behind the net profit shown in the profit and loss account except to the extent the Explanation provides. It followed that the Income Tax Officer had no jurisdiction to rework the net profits of a company which consistently charged depreciation at Income Tax Rules rates by substituting the rates in Schedule XIV to the Companies Act.
The Court set out the history: section 80VVA, inserted by the Finance Act 1983 to make profitable companies pay some tax, was replaced by section 115J from assessment year 1988-89, with the difference that the tax on book profits could not be adjusted against tax on regular assessment later; book profits tax was abandoned from assessment year 1990-91 and returned as minimum alternate tax under section 115JA from 1997-98. It quoted the Finance Minister's budget speech and Circular No.495 of 22 September 1987 to establish the object - to reach so-called zero tax companies which showed book profit but no taxable income. It then adopted the reasoning of Apollo Tyres. The reference in section 115J to Parts II and III of Schedule VI serves the limited purpose of letting the Assessing Officer rely on an authentic statement of accounts. The Companies Act already obliges the company to maintain accounts in the prescribed manner, has them scrutinised and certified by statutory auditors, approved by the company in general meeting and filed with the Registrar, who must himself be satisfied that they comply. Given all that machinery, the Revenue's argument that the Assessing Officer may nonetheless rescrutinise the accounts could not be accepted. The Court also recorded the assessee's points, which the Revenue never met: no dispute had been raised that the profit and loss account failed to comply with Schedule VI; Schedule VI contains no reference to sections 205 or 350 or to Schedule XIV; Note 3(iv) to Part II requires only that the amount provided for depreciation, or the fact that none has been provided, be stated; Company Law Board Circular No.2 of 1989 treats the Schedule XIV rates as minimum rates; and Note 5 to Schedule XIV itself contemplates that different rates or useful lives may be used, provided they are disclosed.
The Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to Section 115-J.
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Handle my notice → Ask a CA on WhatsAppNo. The Supreme Court allowed the company's appeals and set aside the Kerala High Court. Following the three-Judge Bench in Apollo Tyres, it held the controversy was no longer res integra: for section 115J the Assessing Officer may only check that the accounts are certified as properly maintained under the Companies Act, and then make the increases and reductions the Explanation allows. He has no jurisdiction to go behind the net profit shown in the profit and loss account. So where a company has consistently charged depreciation at Income Tax Rules rates in accounts audited, approved in general meeting and filed with the Registrar without objection, the book profit cannot be reworked at Schedule XIV rates. This was decided by the Supreme Court (Supreme Court of India - Ashok Bhan and Dalveer Bhandari, JJ. (judgment per Dalveer Bhandari, J.)) and bears on section 115J of the Income Tax Act 1961. It is reported as 2008 AIR SCW 3407; (2008) 12 SCC 612; AIR 2008 SC (Supp) 1794; 2008 Tax LR 465; (2008) 300 ITR 251. This is the decision that applied Apollo Tyres to the depreciation question and settled, at least for section 115J, that the book profit is what the company's own certified accounts show. Its supporting points are worth having: Schedule VI, Parts II and III, which is what section 115J(1A) actually incorporates, nowhere requires depreciation at Schedule XIV rates and does not even refer to sections 205 or 350; Note 3(iv) to Part II requires only disclosure of what has been provided; and Company Law Board Circular No.2 of 1989 treats the Schedule XIV rates as minimum rates, with Note 5 to that Schedule contemplating different rates being used and disclosed. But it must be read together with the later reference order in Dynamic Orthopedics, where a two-Judge Bench said this decision needs reconsideration by a larger Bench. If it applies to you, the first step is this: Make sure the accounts are audited under the Companies Act, approved by the shareholders and filed with the Registrar without objection - that chain of certification is what keeps the Assessing Officer out of the accounts.
The appeals were against a common judgment of the Kerala High Court dated 13 November 2001 in Income Tax References Nos.245, 259, 289 and 293 of 1999, covering assessment years 1988-89 and 1989-90. The company had consistently debited depreciation in its profit and loss account at the rates prescribed by the Income Tax Rules, 1962. Its accounts were audited under section 227 of the Companies Act, 1956, the audit report confirmed a true and fair view, the accounts were approved by the shareholders in general meeting and filed with the Registrar of Companies, and no objection was taken to them. For assessment year 1988-89 it had returned a loss of Rs.1,12,293 and claimed a refund of Rs.8,62,730 of prepaid tax; the Deputy Commissioner rejected the returned figures, assessed total income at Rs.47,26,270 and raised a demand of Rs.26,83,327 after credit for advance tax and tax deducted. The Revenue's case, accepted by the High Court, was that section 115J is legislation by incorporation which brings in section 205 of the Companies Act, that section 205 permits depreciation to the extent specified in section 350, and that section 350 requires the Schedule XIV rates - so book profit had to be reworked at those rates. The company relied on Apollo Tyres and on decisions of the Punjab and Haryana, Bombay and Gujarat High Courts following it. The Revenue relied on decisions of the Kerala and Madhya Pradesh High Courts the other way. The matter was decided on 2008-04-10 by the Supreme Court (Supreme Court of India - Ashok Bhan and Dalveer Bhandari, JJ. (judgment per Dalveer Bhandari, J.)). On those facts the Supreme Court held as follows. The appeals were allowed and the High Court's order set aside, the parties bearing their own costs. The Court held the controversy was no longer res integra because a three-Judge Bench in Apollo Tyres Ltd v. CIT had already interpreted section 115J, and there was no scope for further discussion. On that interpretation the Assessing Officer computing income under section 115J has only the power to examine whether the books of account are certified by the authorities under the Companies Act as properly maintained in accordance with that Act, and thereafter the limited power of making the increases and reductions provided in the Explanation to the section. He does not have jurisdiction to go behind the net profit shown in the profit and loss account except to the extent the Explanation provides. It followed that the Income Tax Officer had no jurisdiction to rework the net profits of a company which consistently charged depreciation at Income Tax Rules rates by substituting the rates in Schedule XIV to the Companies Act.
The Court set out the history: section 80VVA, inserted by the Finance Act 1983 to make profitable companies pay some tax, was replaced by section 115J from assessment year 1988-89, with the difference that the tax on book profits could not be adjusted against tax on regular assessment later; book profits tax was abandoned from assessment year 1990-91 and returned as minimum alternate tax under section 115JA from 1997-98. It quoted the Finance Minister's budget speech and Circular No.495 of 22 September 1987 to establish the object - to reach so-called zero tax companies which showed book profit but no taxable income. It then adopted the reasoning of Apollo Tyres. The reference in section 115J to Parts II and III of Schedule VI serves the limited purpose of letting the Assessing Officer rely on an authentic statement of accounts. The Companies Act already obliges the company to maintain accounts in the prescribed manner, has them scrutinised and certified by statutory auditors, approved by the company in general meeting and filed with the Registrar, who must himself be satisfied that they comply. Given all that machinery, the Revenue's argument that the Assessing Officer may nonetheless rescrutinise the accounts could not be accepted. The Court also recorded the assessee's points, which the Revenue never met: no dispute had been raised that the profit and loss account failed to comply with Schedule VI; Schedule VI contains no reference to sections 205 or 350 or to Schedule XIV; Note 3(iv) to Part II requires only that the amount provided for depreciation, or the fact that none has been provided, be stated; Company Law Board Circular No.2 of 1989 treats the Schedule XIV rates as minimum rates; and Note 5 to Schedule XIV itself contemplates that different rates or useful lives may be used, provided they are disclosed. In the words reproduced by the source cited on this page: "The Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to Section 115-J."
It was decided by the Supreme Court on 2008-04-10 and is reported as 2008 AIR SCW 3407; (2008) 12 SCC 612; AIR 2008 SC (Supp) 1794; 2008 Tax LR 465; (2008) 300 ITR 251. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 115J, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals were allowed and the High Court's order set aside, the parties bearing their own costs. The Court held the controversy was no longer res integra because a three-Judge Bench in Apollo Tyres Ltd v. CIT had already interpreted section 115J, and there was no scope for further discussion. On that interpretation the Assessing Officer computing income under section 115J has only the power to examine whether the books of account are certified by the authorities under the Companies Act as properly maintained in accordance with that Act, and thereafter the limited power of making the increases and reductions provided in the Explanation to the section. He does not have jurisdiction to go behind the net profit shown in the profit and loss account except to the extent the Explanation provides. It followed that the Income Tax Officer had no jurisdiction to rework the net profits of a company which consistently charged depreciation at Income Tax Rules rates by substituting the rates in Schedule XIV to the Companies Act. It arises in Assessment & Scrutiny and How Tax Law Is Read matters, on section 115J of the Income Tax Act 1961, and was decided by Supreme Court of India - Ashok Bhan and Dalveer Bhandari, JJ. (judgment per Dalveer Bhandari, J.). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Disclose the depreciation method and rates used where they differ from the Schedule rates, as Note 5 to Schedule XIV requires. When book profit is reworked, ask which clause of the Explanation authorises the adjustment; anything outside the Explanation is beyond jurisdiction. Check the present state of this question before advising, because a later Supreme Court Bench has referred it for reconsideration. Note that this decision construes section 115J; the successor provisions have their own text and their own case law.
Validity check could not be completed. This is a two-Judge Bench decision applying the three-Judge Bench decision in Apollo Tyres. In Dynamic Orthopedics Pvt Ltd v CIT (2010) 321 ITR 300 a coordinate two-Judge Bench held in terms that it needs reconsideration, took the view that section 115J incorporates only Parts II and III of Schedule VI and not sections 205, 350 or 355, said the Kerala High Court view reversed here was right, and referred the matter to a larger Bench. What has become of that reference can now be traced a good way further, though not to an end. The referred appeal is Civil Appeal No. 8419 of 2003 (Dynamic Orthopedics Pvt Ltd v CIT, Cochin). It was listed repeatedly before three-Judge Benches from 2015 onwards, and on 24 and 25 September 2019 it was heard by a Bench of Banumathi, Bopanna and Hrishikesh Roy JJ, which recorded that the hearing was concluded and judgment reserved, permitted written submissions, and listed connected matters for 1 October 2019; the connected appeals and petitions heard with it were disposed of on the Revenue's monetary-limit circular, CBDT Circular No. 17/2019 of 8 August 2019. No judgment answering the reference has been reported since. Nothing later than 25 September 2019 in that appeal is carried on indiankanoon, and a Division Bench of the Gujarat High Court in PCIT v Kansara Popatlal Tribhuvan Metal Pvt Ltd, 21 August 2023, was still proceeding on the footing that the matter is pending reconsideration before the larger Bench, holding on the authority of Ashok Sadarangani that until a decision is modified or altered it continues to hold the field, and deciding the appeal on Malayala Manorama. The Supreme Court's own case-status portal could not be queried to confirm the live position: every route into it (by case number, diary number or party name) is behind a CAPTCHA. So the honest position is that the reference was argued and reserved in September 2019 and no answer to it has surfaced in the seven years since. Until it is answered, this decision continues to bind, but a practitioner should say so in those terms rather than cite it flat. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The key quotation above is the passage from Apollo Tyres which this judgment reproduces and adopts as its ratio, not a formulation of its own; the Court's own operative reasoning is that the question is no longer res integra. Two questions the assessee had raised before the High Court - whether the proceeding of 9 October 1992 was a valid order under section 154, and whether the computation under section 115J could be made by that order - are recorded in the judgment but not separately answered; the appeals were simply allowed and the High Court's order set aside. The batch line lists sections 115JA and 115JB; the judgment mentions section 115JA only in passing when tracing the history and decides nothing under either. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were allowed and the High Court's order set aside, the parties bearing their own costs. The Court held the controversy was no longer res integra because a three-Judge Bench in Apollo Tyres Ltd v. CIT had already interpreted section 115J, and there was no scope for further discussion. On that interpretation the Assessing Officer computing income under section 115J has only the power to examine whether the books of account are certified by the authorities under the Companies Act as properly maintained in accordance with that Act, and thereafter the limited power of making the increases and reductions provided in the Explanation to the section. He does not have jurisdiction to go behind the net profit shown in the profit and loss account except to the extent the Explanation provides. It followed that the Income Tax Officer had no jurisdiction to rework the net profits of a company which consistently charged depreciation at Income Tax Rules rates by substituting the rates in Schedule XIV to the Companies Act.
TaxSphere, “Malayala Manorama Co Ltd v CIT”, https://taxnotice.vittsphere.com/caselaw/case/malayala-manorama-co-ltd-v-cit/ (validity last checked 2026-09-16)
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