2023 (3) TMI 558 - AT - Income Tax

Adjustment in terms of clause (iii) of Explanation-1 to Section 115JB(2) for computation of book profits made by the AO resulting in lower adjustment - adjustment of carried forward business loss or unabsorbed depreciation whichever is lower, against Book Profit for the purposes of Section 115JB - HELD THAT - The assessee has correctly considered the figure of unabsorbed depreciation for Financial Year 2010-11 in its working which portion has remained unabsorbed against the existing book profits of that year. CIT(A) in our view, has wrongly considered the entire depreciation allowance of Rs.39,38,03,227/- instead of restricting itself to the unabsorbed component. The figure of Rs.39,38,03,227/- considered by the CIT(A) is total depreciation allowance instead of unabsorbed depreciation and thus the position taken by the CIT(A) is contrary to the phraseology of clause (iii) of Explanation-1 to Section 115JB(2). To reiterate clause (iii) of Explanation-1 to Section 115JB(2) uses the expression unabsorbed depreciation which has distinct connotations vis- -vis total depreciation. We thus find merit in the plea of the assessee in justification of the computation of adjustment available to it against the book profit. In this view of the matter, the claim of the assessee being lower of unabsorbed depreciation and business loss deserves to be set off against the current year book profit in terms of the provisions of clause (iii) of Explanation-1 of Section 115JB(2) of the Act. Appeal of assessee allowed.

Summary

Issues Involved:
1. Computation of adjustment allowable under clause (iii) of Explanation-1 to Section 115JB(2) for computation of book profits.
2. Determination of "unabsorbed depreciation" versus "total depreciation" for the purposes of adjustment against book profits.

Summary:

Issue 1: Computation of Adjustment Allowable under Clause (iii) of Explanation-1 to Section 115JB(2) for Computation of Book Profits
The assessee challenged the computation of adjustment allowable under clause (iii) of Explanation-1 to Section 115JB(2) for computation of book profits, resulting in a lower adjustment of Rs.93,06,502/-. The Assessing Officer computed the tax liability on re-determined book profits of Rs.1,10,12,730/-. The CIT(A) observed that the assessee is not entitled to such adjustment, stating that the profit for FY 2010-11 before depreciation and amortization of Rs.17,19,98,265/- should be set off against brought forward losses. Consequently, there would be nil loss as on 01.04.2011, and the appellant's claim for set off of accumulated depreciation or losses was rejected.

Issue 2: Determination of "Unabsorbed Depreciation" versus "Total Depreciation" for Adjustment Against Book Profits
The assessee contended that the CIT(A) wrongly computed the amount of unabsorbed depreciation and business loss for FY 2010-11. The CIT(A) separated the total depreciation of Rs.39.38 crore as unabsorbed depreciation, resulting in nil business loss and unabsorbed depreciation of Rs.41,21,25,855/-. The Tribunal noted that the expression "unabsorbed depreciation" reflects the intention that only the balance unabsorbed depreciation after adjusting against available profit should be considered. The Tribunal found that the CIT(A) considered the entire depreciation allowance instead of restricting it to the unabsorbed component, contrary to clause (iii) of Explanation-1 to Section 115JB(2). The assessee's computation of unabsorbed depreciation at Rs.22,18,04,962/- was deemed correct.

Conclusion:
The Tribunal reversed the action of the CIT(A) and allowed the claim of the assessee, permitting the set off of Rs.93,06,502/- being lower of unabsorbed depreciation and business loss against the current year book profit. The appeal of the assessee was allowed.