2019 (5) TMI 1757 - AT - Income Tax

Disallowing of benefit of brought forward unabsorbed depreciation while calculating the income under section 115 JB - adjustment of the brought forward loss/ unabsorbed depreciation against the reduction of share capital treated as set off against the reduction in the share capital - whether the assessee can claim the set off unabsorbed depreciation which has already been adjusted against the capital reduction of the company in a scheme approved by the Hon ble Gujarat High Court? - set off of the unabsorbed depreciation, which already adjusted against the reduction of share capital, against the business profit of the current year - HELD THAT - As decided in case of Surat Textile Ltd 2016 (6) TMI 525 - ITAT AHMEDABAD restructuring credits brought by the assessee to the profit loss account against accumulated profit and loss/debit balance, while giving effect to the scheme sanctioned by the BIFR would not extinguish alleged loss and depreciation from the accounts of the assessee in actual terms. Such loss would be available to the assessee as per the accounts prepared under Part-II and III of Schedule-VI, and the assessee will be entitled to claim reduction of loss/unabsorbed depreciation, whichever is lower, from the book profit under clause (iii) of Explanation to Section 115JB, while making such computation for the purpose of section 115JB. We allow the appeal of the assessee and set aside the orders of the Revenue authorities on this issue. We direct the ld.AO to grant deduction of unabsorbed depreciation from the book profit under clause (iii) of Explanation to Section 115JB(2) of the Income Tax Act, 1961. - Decided in favour of assessee

Issues Involved:
1. Adjustments to book profit under section 115JB of the Income Tax Act, 1961.
2. Brought forward unabsorbed loss or unabsorbed depreciation and its effect on taxability under section 115JB.
3. Non-allowance of benefit of brought forward unabsorbed depreciation as per section 115JB(1)(iii).
4. Charging of interest under section 234B of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Adjustments to Book Profit under Section 115JB:
The primary issue raised by the assessee was the disallowance of the benefit of brought forward unabsorbed depreciation while calculating book profit under section 115JB of the Act. The assessee contended that the reduction in share capital pursuant to a scheme approved by the Hon'ble Gujarat High Court did not impact the brought forward losses and unabsorbed depreciation, which should still be available for set-off against the book profit. The AO disagreed, stating that there was no brought forward loss/unabsorbed depreciation in the books, thus disallowing the adjustment.

2. Brought Forward Unabsorbed Loss or Unabsorbed Depreciation:
The assessee argued that the capital reduction did not represent the income/profit of the company and thus, the brought forward losses and unabsorbed depreciation should be allowed as deductions. The AO, on the other hand, maintained that since the unabsorbed depreciation was not reflected in the financial statements, it could not be adjusted. The CIT (A) upheld the AO's view, emphasizing that book profit must be calculated as per the audited profit and loss account for the relevant AY.

3. Non-Allowance of Benefit of Brought Forward Unabsorbed Depreciation:
The Tribunal examined whether the assessee was entitled to set off the unabsorbed depreciation against the current year's business profit. The Tribunal referred to the case of Surat Textile Ltd vs. CIT, where it was held that restructuring credits against accumulated losses do not extinguish the losses for the purpose of section 115JB. The Tribunal noted that the unabsorbed depreciation was not adjusted against the income/profit of the company and thus should be available for set-off.

4. Charging of Interest under Section 234B:
Although the primary focus was on the adjustments under section 115JB, the charging of interest under section 234B was also contested. However, the detailed judgment primarily addressed the core issue of unabsorbed depreciation and its treatment under section 115JB.

Conclusion:
The Tribunal concluded that the restructuring credits brought into the profit and loss account against accumulated losses did not extinguish the unabsorbed depreciation. The Tribunal allowed the appeal, directing the AO to grant the deduction of unabsorbed depreciation from the book profit under section 115JB. The Tribunal's decision was based on the principles laid out in previous judgments and the interpretation of relevant sections of the Income Tax Act, 1961. The appeal was allowed, and the addition/disallowance made by the AO was directed to be deleted.

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