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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 ..... rbed 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 ? - A. A. R. No. 652 of 2004. - - - Dated:- 19-7-2006 - SYED SHAH MOHAMMED QUADRI AND A. S. NARANG, JJ. Mahendra Singh, for the Department V. Ramachandran, for the applicant RULING 1. A. S. Narang (Member).-In this case an applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms 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 nil. The applicant, therefore, would not be liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -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 brought forward or unabsorbed dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unabsorbed loss (-) ₹ 1,234 cr. (ii) unabsorbed loss (-) ₹ 1,755 cr. Whichever is less 1,234 cr. Whichever is less 1,755 cr. Adjusted book profit 313 cr. Adjusted book profit as computed by the applicant (-) 208 cr. Less 233.45 cr. Since as per the applicants method of calculation, the adjusted book profit is negative, there can be no levy of mini mum alternate tax for the f.y. 2003-04 Balance adjusted book profit subject to levy of minimum alternative tax under section 115JB 79.55 cr. However, according to the applicant for next f. y. the following amounts are car ried forward in the books : As per the above computed for the purpose of section 115JB(2) in respect of the next f.y. the applicant is entitled to carry forward the following amounts : (a) Book profit as per audited accounts 1,547 cr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hod of computation adopted by the applicant is not at variance with the specific provision contained in the statute, the same cannot be rejected on the ground that it has no basis whatsoever. Neither the notes on clauses nor the memorandum explaining the objects of the subject provision indicate any particular method that should be followed in computing the taxable income. Hence, the applicant is bound only to adopt a methodology, which is based on the interpretation of the specific provision contained in the statute and not on any other basis. The applicant does not have any doubt as to the comparison between the amount of loss brought forward and unabsorbed depreciation and in reducing the lower of the two from the current year s net profit for ascertaining the book profit. The issue is only with reference to whether the current year's profit is to be adjusted against the loss brought forward or against the unabsorbed depreciation in the books of account of the applicant. The question for decision before the hon ble Authority, it is submitted, is whether section 115JB imposes any restriction with regard to the discretion of an assessee in the matter of computation of book pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 115JB in the subsequent assessment year. The carry forward of its consolidated book loss (including depreciation), being governed by the Companies Act, the reduction of book loss or book depreciation, as the case may be, in its memorandum of adjusted statement filed in terms of section 115JB are to be ignored. In the immediately following assessment year, the computation of income-tax liability under section 115JB must start with net profit as per the profit and loss account of that year which shows the consolidated figure of book loss (including depreciation) brought forward as per the Companies Act. No reference to the adjustments done in terms of section 115JB in the preceding assessment year or years would, in the submission of the applicant, be required. Based on the above reasoning, the applicant's contention is that, for the purposes of quantification of income-tax liability under section 115JB, although the reduction from the current year's profits to be made 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distribution of dividend by a company which had earlier incurred losses, the company is required to reduce the current year s profit by the amount of loss or an amount which is equal to the amount provided for depreciation for that year or those years whichever is less. It is this very concept, which was incorporated in section 115J of the Act under the Explanation, which states that for the purposes of section 115J, book profit means the net profit as shown in the profit and loss account for the relevant previous year and as reduced by clauses (i) to (iv). Sub-clause (iv) which is relevant is reproduced hereunder : (iv) the amount of the loss or the amount of depreciation which would be required to be set off against the profit of the relevant previous year as if the provisions of clause (b) of the first proviso to sub- section (1) of section 205 of the Companies Act, 1956 (1 of 1956), are applicable. 14. Under section 205 of the Companies Act this methodology was prescribed so that the dividend distribution did not erode the capital of the concerned company and the concept was incorporated in section 115J for the same purpose, i.e., the payment of MAT would not adverse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the primary foundations of law and accountancy. There can be several parallel streams of accounting, each of them independently following its own accounting and legal parameters prescribed by the respective statutes. The Companies Act prescribes rates of depreciation which are lower than those prescribed under the Income-tax Rules. For compliance with the Companies Act, the concerned companies are required to claim depreciation at the rates prescribed under the Companies Act. The closing written down value after such depreciation claim would become the opening written down value for the following year. The concerned company would not have any option in the matter. The written down value would be reflected year after year in conformity with the rates of depreciation claimed under the Companies Act. For all obligations under the Companies Act, it is such rates of depreciation and the resultant written down values, which would have to be taken cognizance. Under the Income-tax Act, the depreciation schedule would reflect the depreciation claim allowable as per the rates prescribed under the Income-tax Rules and the written down values year after year would be accordingly determined. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing examples illustrate as to how the amended provi sions relating to the new section will be applied :- Year 1984 Loss excluding depreciation 3,00,000 Loss excluding depreciation 80,000 Depreciation 1,00,000 Depreciation 4,00,000 4,00,000 Year 1985 Profit before depreciation 5,00,000 Profit before depreciation 5,00,000 Depreciation 2,00,000 : Depreciation 4,00,000 as per books 3,00,000 1,00,000 Nil C.F. unabsorbed depre ciation 1985 3,80,000 Year 1986 Net loss as per books before depreciation (-) 10,00,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Latin expression as per Black s Law Dictionary is Contemporaneous exposition, or construction ; a construction drawn from the time when, and the circumstances 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 Ed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n for the simple reason that though the provisions for working out the book profit as contained in the Explanation have undergone little change, the basic provisions practically 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry for the purpose of complying with the provisions of section 115J. 22. In view of the foregoing discussion, it is not possible to uphold the contention of the applicant that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that a notional income is made taxable under sub-section (1) ; (iii) The taxable income arrived at under sub-section (1) of section 115J should be deemed as available for purposes of setting 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 wo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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