2016 (6) TMI 525 - AT - Income Tax

Disallowance of deduction of alleged accumulated unabsorbed depreciation of earlier years while computing the book profit for the purpose of section 115JB - Held that - CIT(A) failed to justify why a different stand has been taken in this assessment year, where in the previous two assessment years, consistently, the AO has allowed reduction of unabsorbed loss/depreciation under clause (iii) of Explanation to section 115JB while calculating the book profit. In the Asstt.Year 2010-11, the AO has granted reduction. The order of the AO was sought to be revised by the ld.Commissioner by exercise of power under section 263 of the Act. However, the conclusions of the ld.Commissioner did not get approval from the Tribunal, and that order has been set aside. The assessment order in Asstt.Year 2010-11 has been restored. Considering all these factors in their setting as a whole, we are of the view that 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 amounting to ₹ 27,36,90,817/- 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. Whether the CIT(A) erred in confirming the AO's action of disallowing the deduction of accumulated unabsorbed depreciation of earlier years while computing the book profit for the purpose of Section 115JB of the Income Tax Act, 1961.

Detailed Analysis:

Background and Facts:
The assessee, engaged in the business of manufacturing polyester chips, polyester yarn, and property development, filed a return of income declaring NIL income. The AO, upon scrutiny, noted discrepancies in the computation of book profit under Section 115JB of the Income Tax Act, particularly concerning the deduction of accumulated unabsorbed depreciation of ?27,36,90,817/-.

Issue 1: Computation of Book Profit under Section 115JB:
The primary issue is whether the assessee correctly computed the book profit by reducing the unabsorbed depreciation from earlier years. The AO contended that the assessee should have computed the book profit at ?27,51,00,602/- instead of NIL, as the unabsorbed depreciation should not have been deducted.

Assessee's Stand:
The assessee argued that the adjustment of debit balance of the profit and loss account against the credit in the rehabilitation scheme account was done as per the BIFR's directions and was not in accordance with the Schedule-VI of the Companies Act. They contended that such adjustments do not have statutory backing and should not affect the computation of book profit under Section 115JB. The assessee maintained that the unabsorbed depreciation should be deductible as per the provisions of the Income Tax Act.

AO's Stand:
The AO rejected the assessee's claim, stating that the unabsorbed depreciation should be considered NIL due to the adjustments made in the rehabilitation scheme account, thus increasing the book profit to ?27,51,00,602/-.

CIT(A)'s Stand:
The CIT(A) upheld the AO's decision, stating that the principle of consistency does not apply if the earlier year's view was contrary to law. On merit, the CIT(A) opined that once the unabsorbed depreciation/loss was set off against the credit balance in the rehabilitation account, nothing remained for the assessee to claim as a deduction while computing the book profit.

Tribunal's Analysis:
The Tribunal examined whether the restructuring credits credited to the profit and loss account against accumulated profit and loss debit balance would mean that the alleged accumulated losses have been absorbed and are not available for deduction under Section 115JB. The Tribunal noted that the primary purpose of preparing the profit and loss account is to disclose the result of the company's working during the period covered by the account. Items not of income nature should not be credited to the profit and loss account.

Key Observations:
1. Accounting Standards and Schedule-VI: The Tribunal referred to the guidance notes issued by the Institute of Chartered Accountants of India and the provisions of Part-II of Schedule-VI of the Companies Act. It was noted that items of capital nature should not be included in the profit and loss account.
2. Previous Years' Consistency: The Tribunal highlighted that in previous years, the AO had allowed the deduction of unabsorbed depreciation from the book profit. The principle of consistency should be followed unless there is a significant change in facts or law.
3. Nature of Restructuring Credits: The Tribunal emphasized that restructuring credits were not of income nature and thus should not affect the computation of book profit under Section 115JB.

Conclusion:
The Tribunal concluded that the restructuring credits brought by the assessee to the profit and loss account against accumulated profit and loss/debit balance, while giving effect to the BIFR scheme, would not extinguish the alleged loss and depreciation from the accounts of the assessee. Therefore, the assessee is entitled to claim the deduction of unabsorbed depreciation from the book profit under Section 115JB.

Judgment:
The appeal of the assessee was allowed. The AO was directed to grant the deduction of unabsorbed depreciation amounting to ?27,36,90,817/- from the book profit under clause (iii) of Explanation to Section 115JB(2) of the Income Tax Act, 1961.

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