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TMI Blog2006 (7) TMI 656X X X X Extracts X X X X X X X X Extracts X X X X ..... calculating the book profit under section 115JB bifurcate such consolidated loss into loss brought forward and unabsorbed depreciation and avail of the benefit of reduction envisaged under sub-section (2) of section 115JB in a manner most beneficial to it ? Whether it is open to the applicant to set off the current year's profit against the loss brought forward or unabsorbed depreciation in a manner most beneficial to it subject, however, to the provisions of sub-section (2) and whether such adjustment can be changed from year to year ? Whether the applicant can change the method of setting off the current year's profit against loss brought forward or unabsorbed depreciation from year to year and whether that amounts to a change in the method of accounting and requires the approval of the assessing authority ? Which of the methods viz. the method adopted by the applicant for calculating the book profit for the assessment years 2004-05 and 2005-06 or the method adopted by the Revenue for the aforesaid assessment years is the correct method ? X X X X Extracts X X X X X X X X Extracts X X X X ..... fit of ₹ 521 crores (approximately). In terms of sub-section (2) of section 115JB the net profit has to be reduced by the business loss or unabsorbed depreciation whichever is less and if the said adjustment is made there would be no book profit liable for assessment under section 115JB for the assessment year 2003-04. 4. For the financial year 2003-04 (assessment year 2004-05) the applicant reported a profit of ₹ 1,547 crores (approximately), During the said year, the total brought forward loss of ₹ 4,461 crores (approximately) shown in the profit and loss account by the applicant comprises of business loss of ₹ 1,755 crores (approximately) and unabsorbed depreciation of ₹ 2,706 crores (approximately), the profit of ₹ 521 crores (approximately) for the financial year 2002-03 (assessment year 2003-04) having been adjusted against the unabsorbed depreciation. It is stated by the applicant that, in terms of sub-section (2) of section 115JB the current year's profit has to be reduced by the business loss or unabsorbed depreciation, whichever is less and accordingly the book profit for the financial year 2003-04 (assessment year 2004-05) would be ni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epreciation ? In the event of such set-off being made by the applicant in one year, can it in the subsequent years adopt a different method of set-off ? Can the applicant set off the current year's profit partly against the business loss brought forward and partly against unabsorbed depreciation in such proportion as it might decide ? (c) Whether the applicant having disclosed the aggregate loss comprising loss brought forward and unabsorbed depreciation as a consolidated figure in its profit and loss account, can for the purpose of calculating the book profit under section 115JB bifurcate such consolidated loss into loss brought forward and unabsorbed depreciation and avail of the benefit of reduction envisaged under sub-section (2) of section 115JB in a manner most beneficial to it ? (d) Whether it is open to the applicant to set off the current year's profit against the loss brought forward or unabsorbed depreciation in a manner most beneficial to it subject, however, to the provisions of sub-section (2) and whether such adjustment can be changed from year to year ? (e) Whether the applicant can change the method of setting off the current year's profit against loss b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ethodology has been adopted for the subsequent accounting year, i.e., net profit has been reduced by brought forward loss of earlier years for the purpose of MAT under section 115JB but for the purpose of carry forward to the subsequent year the same has been reduced by brought forward depreciation. That the applicant has chosen its own methodology of carry forward of book loss/book depreciation to either totally avoid or substantially reduce the MAT liability under the provisions of section 115JB of the "Act" ; ignoring the Central Board of Direct Taxes Circular No. 495 (see [1987] 168 ITR (St.) 87, 110)-para. 36 under section 115J illustrating year-wise carry forward and set off of book loss/depreciation and its set off against subsequent year's profit. 8. A comparative presentation of the MAT liability according to the Revenue and the applicant, would amply illustrate the contentious issue. Computation of adjusted book profit under the provisions of section 115JB(2) Book profits as per audited accounts. 521 cr. Book profit as per audited accounts 521 cr. As reduced by : (i) Aggregate book loss for the last 12 years (-) ₹ 1,755 cr. (i) Aggregate book loss for the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l year 2004-05 (assessment year 2005-06) Estimated book profit as per the applicant 2,250 cr. Estimated book profit as per the applicant 2,250 cr. As reduced by : As reduced by : (i) Brought forward unabsorbed loss as computed for earlier year Rs. Nil (i) unabsorbed business dep. (-) ₹ 1,159 cr. or or (2) Whichever is less 1,159 cr. Adjusted book profit on which the applicant is required to pay advance tax on account of MAT liability is ₹ 2,250 cr. Adjusted book profit on which the MAT liability arises is ₹ 1,091 cr. On such adjusted book profit, total advance tax payable by the applicant would amount to ₹ 176.42 cr. On such adjusted book profit according to the applicant, advance tax payable by the applicant would be ₹ 85.55 cr. 9. The applicant in its rejoinder to the written submissions of the Commissioner has stated that while it is true that there is a disagreement between the applicant and the income-tax authority regarding the methodology to be adopted for computing the taxable income for the purpose of section 115JB, the comments of the Commissioner that the method adopted by the applicant is intended to either totally avoid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required to be computed under the provisions of section 115JB. 10. The main submissions of the applicant during the course of oral hearing and subsequent written submissions dated March 11, 2006, received in the office of the Authority on March 16, 2006, are summarized as under : The applicant prepares its accounts in conformity with the Companies Act, 1956. It shows only the consolidated figure of loss (including depreciation) in such accounts prepared. No bifurcation of such consolidated loss into book loss excluding depreciation and book depreciation is made separately, there being no such requirement as per the Companies Act. For purposes of compliance with the provisions of section 115JB of the Income-tax Act, the applicant bifurcates such consolidated loss shown in its accounts into book loss and book depreciation and claims the lesser of these two against its current profit. Such bifurcation is done only through a memorandum of adjusted statement prepared by the applicant for computation of its tax liability alone. Such bifurcation is not reflected in the annual accounts maintained under the Companies Act and hence has relevance for income-tax assessment only. Each asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e year to the next. The applicant has argued against its application on the ground that this circular cannot be construed as a total statement of law on the subject, but is only one of the interpretations. The Central Board of Direct Taxes circular is not binding on the applicant and it is open to the applicant to establish that a different interpretation is permissible under the law. 12. The contention of the applicant that the Companies Act does not contain any provision for bifurcation of loss is not tenable. Proviso (b) to sub- section (1) of section 205 of the Companies Act states as under : Section 205(1) of Companies Act, 1956 : 205. Dividend to be paid only out of profits. (1)-. . . Provided that- . . . . (b) if the company has incurred any loss in any previous financial year or years, which falls or fall after the commencement of the Companies (Amendment) Act, 1960, then, the amount of the loss or an amount which is equal to the amount provided for depreciation for that year or those years whichever is less, shall be set off against the profits of the company for the year for which dividend is proposed to be declared or paid or against the profits of the company for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver is less as per books of account. Explanation.-For the purposes of this clause,- (a) the loss shall not include depreciation ; (b) the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation, is nil." 15. The Explanation to sub-clause (iii) therefore leaves no room for doubt that the expression "loss brought forward" does not include depreciation and the net profit of the current year is to be reduced by the lesser of the two and the provisions of sub-clause (iii) shall not apply if the amount of loss brought forward or unabsorbed depreciation is reduced to nil. In other words for the purpose of section 115JB, the brought forward loss and unabsorbed depreciation are required to be depicted separately, independent of each other and after the current year's profit is reduced by the lesser of the two for the purpose of carry forward to the next year, the closing balance of the immediate preceding year would be the opening balance for the succeeding year. Since there is no direct decision on this specific issue this is to be examined according to the general principles of law and accountancy in the light of the particular facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B) will be governed by the relevant sections of the Act being section 32 for depreciation and section 72 for carry forward and set off of loss, etc. Thus the parallel streams of computation under the normal provisions of the Act and section 115JB computation of tax liability are kept separate and independent of each other. Each stream, however, while being separate from the other parallel stream, is based on a continuity of treatment carried out year after year. The principles governing computation within a particular stream are strictly adhered to in every successive year. On the same principle, section 115JB computation must follow the logic of internal consistency and regularity year after year, unaffected by the parallel computations running under the Companies Act and the normal provisions of the Income-tax Act. Reduction made to book loss or book depreciation in any particular year under the minimum alternate tax (MAT) provisions must form a necessary basis for computation of "MAT" liability for the subsequent year, irrespective of the treatment given under the Companies Act, or, for that matter, under the normal provisions of the Income-tax Act. The above interpretation is s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces under which, the subject-matter to be construed, as a statute or custom, originated". In this regard the observations of Justice P. N. Bhagwati of the hon'ble Supreme Court in the case of K. P. Varghese v. ITO [1981] 131 ITR 597, 612 are relevant to the issue. It was held as under : These two circulars of the Central Board of Direct Taxes are, as we shall presently point out, binding on the tax department in administering or executing the provision enacted in sub-section (2), but quite apart from their binding character, they are clearly in the nature of contemporanea expositio furnishing legitimate aid in the construction of sub-section (2). The rule of construction by reference to contem poranea expositio is a well established rule for interpreting a statute by reference to the exposition it has received from contemporary authority, though it must give way where the language of the statute is plain and unambiguous. This rule has been succinctly and felicitously expressed in Crawford on Statutory Construction, 1940 Edn., where it is stated in paragraph 219 that 'administrative construction (i.e. contemporaneous construction placed by administrative or executive officers charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ically remain the same. In so far as from the net profit of the relevant previous year what is required to be reduced is only brought forward loss or unabsorbed depreciation, whichever is less as per the books of account. 20. The applicant's contention that section 205(1) of the Companies Act read with the Supreme Court decision in Surana Steel's case [1999] 237 ITR 777 makes it mandatory that the term "loss" in section 205(1) of the Companies Act must be understood to mean loss after taking into account depreciation, is relevant only for the purpose of payment of dividend out of profits by a company. However, for the purpose of computing "book profit" under section 115JB(2), sub-clause (iii) of the Explanation to the second proviso specifically provides that, for the purposes of the sub-clause loss shall not include depreciation. A specific provision would therefore, overrule the general law, a well-established rule of interpretation, which needs no elaboration. Therefore, for purposes of compliance with the Companies Act, the term "loss" would be taken as after accounting for depreciation, while, in a computation under section 115JB of the Income- tax Act, the term "loss" would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the presentation of accounts in one assessment year under section 115JB will have no relevance to the presentation of accounts in the immediate succeeding year for the same purpose under section 115JB. It, therefore, follows that the contention of the applicant that although the reduction to be made from the current year's profits is the lesser of book depreciation or book loss brought forward from earlier years, yet for the purposes of quantification of carry forward of unabsorbed book loss and book depreciation to the next assessment year, the applicant company has the option to reduce from the current year's profit, either the book loss or the book depreciation, irrespective of which one is lower is without any basis and cannot be approved. 23. By referring to the decision of the jurisdictional High Court in the case of Suryalatha Spinning Mills [1997] 223 ITR 713 (AP) quoted supra it has been contended by counsel for the applicant that calculation under section 115JB does not amount to a method of accounting and accordingly leaves the applicant free to start the computation from the books of each previous year without reference to the manner in which the "book profit" was calc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting of unabsorbed losses or unadjusted allowances, etc., in that assessment year but postponed to the next year without allowing the actual adjustment. In our considered view sub-section (2) gives statutory recognition to the proposition (ii), and gives no scope to entertain propositions (i) and (iii)." 24. Learned counsel for the applicant has also pleaded that section 115JB has introduced a fiction of treating the "book profit" as total income in the case of specified companies. The fiction is to be construed strictly and nothing can be read into the statutory provision to extend the scope of the statutory fiction (CIT v. Mother India Refrigeration Industries P. Ltd. [1985] 155 ITR 711 (SC) and CIT v. C. P. Sarathy Mudaliar [1972] 83 ITR 170, 173 (SC)). Following the principle, as we do, we would add that where the statutory provision is silent regarding carry forward of business loss and unabsorbed depreciation after reduction against the current year's profit, the carry forward would be according to the general principles of law and accountancy as applicable for the purpose of carry forward of loss/unabsorbed depreciation under other Acts. It is not open to each taxpayer to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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