2006 (7) TMI 656 - AAR - Income Tax

Whether, in a case to which section 115JB applies, the applicant has the option to set off the current year s profit against the loss brought forward or unabsorbed depreciation, in its accounts, in a manner different from the manner adopted for determination of book profit under section 115JB ? Whether the applicant has discretion to set off the current year s profit, either against the loss brought forward or unabsorbed depreciation ? In the event of such set-off being made by the applicant in one year, can it in the subsequent years adopt a different method of set-off ? Can the applicant set off the current year s profit partly against the business loss brought forward and partly against unabsorbed depreciation in such proportion as it might decide ? Whether the applicant having disclosed the aggregate loss comprising loss brought forward and unabsorbed depreciation as a consolidated figure in its profit and loss account, can for the purpose of calculating the book profit under section 115JB bifurcate such consolidated loss into loss brought forward and unabsorbed depreciation and avail of the benefit of reduction envisaged under sub-section (2) of section 115JB in a manner most beneficial to it ? Whether it is open to the applicant to set off the current year s profit against the loss brought forward or unabsorbed depreciation in a manner most beneficial to it subject, however, to the provisions of sub-section (2) and whether such adjustment can be changed from year to year ? Whether the applicant can change the method of setting off the current year s profit against loss brought forward or unabsorbed depreciation from year to year and whether that amounts to a change in the method of accounting and requires the approval of the assessing authority ? Which of the methods viz. the method adopted by the applicant for calculating the book profit for the assessment years 2004-05 and 2005-06 or the method adopted by the Revenue for the aforesaid assessment years is the correct method ?

Issues Involved:
1. Whether the applicant can set off the current year's profit against the loss brought forward or unabsorbed depreciation in a manner different from the determination of "book profit" under section 115JB.
2. Whether the applicant has the discretion to choose between setting off the current year's profit against the loss brought forward or unabsorbed depreciation, and if such discretion can be changed in subsequent years.
3. Whether the applicant can bifurcate the consolidated loss into loss brought forward and unabsorbed depreciation for the purpose of calculating the book profit under section 115JB.
4. Whether it is permissible for the applicant to change the method of setting off the current year's profit against the loss brought forward or unabsorbed depreciation from year to year.
5. Whether changing the method of setting off the current year's profit against loss brought forward or unabsorbed depreciation amounts to a change in the method of accounting requiring approval from the assessing authority.
6. Which method of calculating the book profit for the assessment years 2004-05 and 2005-06 is correct: the method adopted by the applicant or the method adopted by the Revenue.

Detailed Analysis:

Issue 1: Setting off Current Year's Profit
The applicant does not have the option to reduce the current year's profit by the loss brought forward or unabsorbed depreciation in a manner different from the determination of "book profit" under section 115JB. The ruling emphasizes that the calculation must adhere to the provisions of section 115JB, which requires the reduction of the net profit by the lesser of the two amounts: loss brought forward or unabsorbed depreciation. The applicant's methodology of setting off profit against unabsorbed depreciation instead of the business loss, as done by the Revenue, was found incorrect.

Issue 2: Discretion in Set-Off and Changing Methods
The applicant does not have the discretion to choose between setting off the current year's profit against the loss brought forward or unabsorbed depreciation. The lesser of the two must be used, and once this method is adopted, it cannot be changed in subsequent years. The ruling states that the applicant cannot reduce the current year's profit partly by the business loss brought forward and partly by unabsorbed depreciation.

Issue 3: Bifurcation of Consolidated Loss
The applicant must bifurcate the consolidated loss into loss brought forward and unabsorbed depreciation for calculating the book profit under section 115JB. However, the applicant cannot avail of the benefit of reduction in a manner different from the one prescribed under the "Act" to be more beneficial to itself. The ruling requires strict adherence to the statutory provisions, which do not allow for the applicant's proposed methodology.

Issue 4: Changing Methods from Year to Year
It is not permissible for the applicant to change the method of setting off the current year's profit against the loss brought forward or unabsorbed depreciation from year to year. Such a change would amount to inconsistency and lack of regularity, which are fundamental principles of law and accountancy. The ruling underscores the need for consistency in the treatment of accounting figures year after year.

Issue 5: Change in Method of Accounting
Changing the method of setting off the current year's profit against the loss brought forward or unabsorbed depreciation from year to year would amount to a change in the method of accounting. This change is not permissible without the approval of the assessing authority. The ruling clarifies that any such change would disrupt the consistency required in the computation of "book profit" under section 115JB.

Issue 6: Correct Method of Calculating Book Profit
The method adopted by the applicant for calculating the book profit for the assessment years 2004-05 and 2005-06 is incorrect and not in accordance with section 115JB. The correct method is the one adopted by the Revenue, which involves reducing the net profit by the lesser of the loss brought forward or unabsorbed depreciation. The ruling supports the Revenue's methodology as it aligns with the statutory provisions and ensures consistency in the computation of "book profit."

Conclusion:
The ruling concludes that the applicant must adhere to the statutory provisions of section 115JB, which require the reduction of the net profit by the lesser of the loss brought forward or unabsorbed depreciation. The applicant's proposed methodology of setting off profit against unabsorbed depreciation instead of the business loss was found incorrect. The ruling emphasizes the need for consistency and regularity in the treatment of accounting figures year after year and does not permit any changes in the method of accounting without approval from the assessing authority.

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