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2022 (2) TMI 806 - AT - Income TaxRectification u/s 154 - Question of debatable issue - disallowance of unabsorbed depreciation loss while determining the book profits u/s. 115JB(2) - AO allowed this claim of the assessee in the order u/s. 143(3) and issued notice u/s. 154 and withdrew the same - HELD THAT - In the present case there was no brought forward business loss as on 1.4.2009 at the beginning of the FY 2009-10 relevant to AY 2010-11 and the loss was already absorbed by capital reduction and there is no question of debate on this issue and the statute is clear. Explanation 1 to clause (iii) of section 115JB(2) of the Act is directly applicable to the facts of the present case. Accordingly this not being a debatable issue, the AO was justified in exercising his powers u/s. 154 of the Act. Therefore, the orders of the lower authorities are confirmed. - Decided against assessee.
Issues Involved:
1. Disallowance of unabsorbed depreciation loss of ?55,69,139 while determining book profits under section 115JB of the Income Tax Act. 2. Legitimacy of the rectification order under section 154 of the Income Tax Act. Issue-wise Detailed Analysis: 1. Disallowance of Unabsorbed Depreciation Loss: The appellant, engaged in the manufacture and sale of instant noodles, had accumulated losses and unabsorbed depreciation over several years. For the fiscal year 2009-10, the appellant set off an unabsorbed depreciation loss of ?55,69,139 against the book profit, resulting in a nil book profit. Initially, this set-off was accepted by the Assessing Officer (AO) during the scrutiny assessment. However, the AO later rectified the assessment order under section 154, disallowing the set-off and determining a tax demand of ?11,65,245. The appellant argued that the disallowance was not a mistake apparent on record under section 154, but a matter of legal interpretation. They relied on precedents such as the Sumi Motherson Innovative Engg. Ltd. case, where it was held that capital reduction does not liquidate losses, and such losses are available for set-off and carry forward. The appellant contended that, similar to the Sumi Motherson case, their unabsorbed depreciation loss should be allowed for set-off despite the capital reduction scheme undertaken in FY 2008-09. The appellant also cited the Surat Textile Mills Ltd. and Prithvi Softech Limited cases, where it was held that restructuring credits and capital reduction schemes do not extinguish losses, and such losses remain available for set-off against book profits. 2. Legitimacy of the Rectification Order under Section 154: The AO observed that no brought forward business loss was available to the appellant for the relevant year, and thus, the appellant was not entitled to set off the unabsorbed depreciation for computing book profit under section 115JB. Consequently, the AO initiated rectification proceedings under section 154 and determined the book profit of ?55,69,139, levying a tax of ?8,60,432. The CIT(Appeals) upheld the AO's rectification order, leading the appellant to file an appeal with the ITAT. The appellant's representative argued that the rectification was not justified as the issue was debatable and not a clear mistake apparent on record. The Tribunal examined the provisions of section 115JB and the relevant precedents. It noted that as per clause (iii) to Explanation 1 to section 115JB(2), the appellant is entitled to set off unabsorbed depreciation or brought forward business loss, whichever is lower. In this case, there was no brought forward business loss available as it was already written off against the share capital. The Tribunal distinguished the appellant's case from the Sumi Motherson case, stating that in the present case, the appellant had no brought forward loss. The Tribunal also reviewed the Prithvi Softech Limited case and found that the facts were different, as the appellant had no balance of brought forward business loss from earlier years. Consequently, the Tribunal agreed with the CIT(Appeals) that the AO was justified in exercising powers under section 154, as there was no debatable issue and the statute was clear. Conclusion: The Tribunal dismissed the appeal, confirming the orders of the lower authorities. It held that the appellant was not entitled to set off the unabsorbed depreciation loss of ?55,69,139 against the book profit for FY 2009-10, and the rectification order under section 154 was justified as there was no apparent mistake on record. The judgment emphasized the clear application of Explanation 1 to clause (iii) of section 115JB(2) and upheld the tax demand determined by the AO.
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