2017 (12) TMI 1046 - AT - Income Tax

Not allowing deduction of brought-forward losses/depreciation while computing book profit u/s. 115JB - Held that - In the case of Surat Textile Mills Ltd. vs. DCIT (2016 (6) TMI 525 - ITAT AHMEDABAD) the all credit balances were accumulated and transferred to Rehabilitation Scheme Account and the profit and loss account was adjusted against the same as per Scheme approved by BIFR for re-habilitation of the assessee under Sick Industries Act. Such adjustments were not made as per the requirements of Companies Act. That fact weighed in favour of the assessee. In the instant case the assessee itself has filed petition before the Hon ble High Court of Bombay for reduction of share capital by adjusting accumulated losses as per the provisions of Companies Act. After receipt of approval from the Hon ble Bombay High Court, the assessee has wiped off the accumulated losses by transferring it to Equity Share capital, thereby reducing the Share capital account. As submitted by the ld. DR all these transactions have happened way back in 2003. All these adjustments have been carried out as per the provisions of Companies Act and after such adjustment; there would not be any accumulated loss as contended by the assessee. We are concerned with determination of book profit for assessment year 2010-11. Admittedly the financial statement prepared for the year under consideration does not contain any entry towards accumulated losses . As stated earlier, there does not exist any accumulated loss in the eyes of law after giving effect to the order passed by Hon ble Bombay High Court for capital reduction. For these reasons, we are of the view that the ld. CIT(A) was justified in upholding the order of AO in rejecting the claim of the assessee

Summary

Issues:
- Deduction of brought-forward losses/depreciation while computing book profit u/s. 115JB of the Income-tax Act, 1961.

Analysis:
1. The appeal pertains to the disallowance of deduction of brought-forward losses/depreciation for computing book profit u/s. 115JB of the Act for the assessment year 2010-11. The assessee, engaged in conducting Coaching Classes, declared nil income under normal provisions and nil book profit u/s. 115JB initially. However, the Commissioner revised the assessment under section 263, disallowing the deduction of brought forward loss/depreciation, resulting in book profit determination at ?27.78 lakhs.

2. The core issue revolves around the treatment of accumulated losses and equity share capital. The assessee had significant accumulated losses and equity share capital, leading to an application under section 100 of the Companies Act, 1956 for capital reduction. The High Court approved the reduction, allowing the assessee to set off accumulated losses against equity share capital, ultimately reducing the equity share capital to ?1.42 crores and showing accumulated loss as nil in the Balance Sheet.

3. The disagreement arose when computing book profit u/s. 115JB for the relevant year. The assessee did not recognize the capital reduction, seeking to set off brought forward losses/depreciation against the net profit. The Assessing Officer and the Commissioner disallowed this claim, emphasizing the absence of brought-forward losses/depreciation in the financial statements, leading to the rejection of the deduction claim.

4. The contention presented by the Authorized Representative relied on a Tribunal decision to argue that the capital reduction for rehabilitation purposes should be disregarded for Section 115JB. Conversely, the Departmental Representative stressed that book profit must align with financial statements prepared per the Companies Act, asserting that the earlier set off in 2003 eliminated brought forward losses, making any deduction baseless.

5. The Tribunal analyzed the contrasting arguments and highlighted the significance of transactions being in compliance with the Companies Act. It noted that the assessee's actions were in line with legal provisions, as approved by the High Court, effectively wiping out accumulated losses by adjusting them against equity share capital in 2003. Consequently, for the assessment year 2010-11, the financial statements did not reflect any accumulated losses post the High Court's approval, justifying the rejection of the deduction claim.

6. Ultimately, the Tribunal upheld the Commissioner's decision, dismissing the appeal filed by the assessee, as the absence of accumulated losses in the financial statements for the relevant year precluded the allowance of deduction for brought-forward losses/depreciation.