2016 (5) TMI 1032 - AT - Income Tax

Allowability of loss on demerger in the computation of book profit u/s 115JB - MAT - Held that - The claimed loss was disclosed by the assessee in the profit & loss account as an extraordinary item and such loss was arrived at by reducing the same from the book value of the asset transferred and further the treatment as given by the assessee to the loss, arose on demerger is in accordance with part II & III to schedule VI of the Companies Act and such demerger was approved by the Hon ble High Court vide order dated 19/09/2008. Even otherwise, as mentioned earlier, the statutory auditors have accepted the book treatment in respect of loss arose on account of demerger, thus, we are not in agreement with the observation of the Ld. Assessing Officer that such loss could not be debited to the profit and loss account and ought to have been adjusted against the reserve of the assessee company. The starting point for computation of book profit u/s 115JB of the Act is the net profit as shown in the profit & loss account for the relevant previous year In the present case, such amount is the loss of ₹ 66,86,13,773/-. There is no concept like multiple profit in the profit & loss account. It is well settled proposition of law that, as per explanation-1 below section 115JB(2) of the Act, only adjustment as permitted to the book profit are those as provided in the said explanation. The purpose of section 115JB of the Act is to provide an alternative method of computation of tax by accepting the book profits as shown by the assessee, albeit with certain adjustment as specified in Explanation-1 to section 115JB(2) and levying tax thereon as alternative to the tax computed under the other provisions of the Act. Assessing Officer wrongly disputed the correctness of the accounts of the assessee. - Decided in favour of assessee.

Summary

Issues Involved:
1. General Nature of the First Ground
2. Non-Adjudication of Grounds Number 3 & 4 by the First Appellate Authority
3. Allowability of Loss on Demerger in the Computation of Book Profit under Section 115JB of the Income Tax Act

Detailed Analysis:

1. General Nature of the First Ground:
The first ground raised by the assessee was deemed general in nature and required no adjudication. Consequently, it was dismissed.

2. Non-Adjudication of Grounds Number 3 & 4 by the First Appellate Authority:
The assessee's counsel argued that grounds number 3 and 4 were not adjudicated by the First Appellate Authority. The Revenue did not dispute this claim. Consequently, these grounds were sent back to the Commissioner of Income Tax (Appeal) for fresh adjudication on merit. The assessee was granted the opportunity to be heard and to furnish additional evidence if necessary. Thus, these grounds were allowed for statistical purposes only.

3. Allowability of Loss on Demerger in the Computation of Book Profit under Section 115JB of the Income Tax Act:
The primary issue for adjudication was whether the loss incurred due to demerger should be allowed in the computation of book profit under Section 115JB of the Income Tax Act. The assessee argued that the loss of ?145.23 crores, resulting from the transfer of assets and liabilities during the demerger, was debited to the profit and loss account as an extraordinary item. The Assessing Officer contended that this loss was not real but notional and should not be allowed.

The Tribunal noted that the demerger scheme, approved by the Hon'ble High Court, mandated the reduction of the book value of all assets and liabilities related to the hospitality undertaking from the assessee's books. The difference was adjusted in the profit and loss account. The High Court observed that the scheme was fair, reasonable, and not violative of any law.

The assessee's annual accounts for the year ending 31/03/2009 included the loss from the demerger, which was disclosed as an extraordinary item. This treatment was in accordance with Schedule VI of the Companies Act and Accounting Standard 5 issued by ICAI. The statutory auditors accepted this treatment, and the accounts were approved by the shareholders.

The Assessing Officer, however, started the computation of book profit with the net profit before extraordinary adjustments, which the Tribunal found contrary to Explanation-1 below Section 115JB(2) of the Act. The Tribunal emphasized that adjustments to book profit are only those specified in the said explanation.

The Tribunal referred to several judicial pronouncements, including Apollo Tyres Ltd. vs CIT and CIT vs HCL Comnet System and Services Ltd., to support the assessee's position. It also noted that the Revenue did not challenge the High Court's approval of the accounting treatment.

The Tribunal concluded that the loss on demerger was correctly debited to the profit and loss account and should be the starting point for computing book profit under Section 115JB. The Tribunal allowed the assessee's ground, holding that the Assessing Officer wrongly disputed the correctness of the accounts.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal directing fresh adjudication of grounds number 3 and 4 and allowing the loss on demerger to be considered in the computation of book profit under Section 115JB.