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TMI Blog2019 (5) TMI 1757X X X X Extracts X X X X X X X X Extracts X X X X ..... m 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 from the book profit under clause (iii) of Explanation to Section 115JB(2) of the Income Tax Act, 1961. - Decided in favour of assessee X X X X Extracts X X X X X X X X Extracts X X X X ..... 9,380/- ₹ 16,60,443/- Book profit u/s.115JB NIL 2.2 The assessee to justify the adjustment of brought forward unabsorbed depreciation for ₹ 1,65,15,093.00 submitted that there was a loss in its balance sheet as on 31.3.2004 for ₹ 4,86,09,111.00 which was adjusted to the tune of ₹ 4,42,00,000.00 against the reduction of share capital in pursuance to a scheme approved by the Hon'ble Gujarat High Court vide order dated 2nd December 2004. 2.3 The assessee further submitted that the capital reduction of ₹ 442 lakhs was not credited in the profit and loss account. Therefore the impugned loss cannot be treated as adjusted against the capital reduction as discussed above. As such the brought forward losses and unabsorbed depreciation of ₹ 4,86,09,111.00 as on 31.3.2004 can only be adjusted against the profit of the company. As such the reduction in the capital does not represent the income/ profit of the company. 2.4 However the AO disagreed with the submission of the assessee by observing that there was no brought forward loss/ unabsorbed depreciation in the books of accounts. Therefore no adjustment for the amount of unabsorbed depreciation as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Hon'ble Gujarat High Court as discussed above. 6.1 It is an undisputed fact that the unabsorbed depreciation was not adjusted against the income/profit of the company. The assessee till 31st March 2004 has shown the brought forward losses and unabsorbed depreciation amounting to ₹ 4,86,09,111.00 only. Subsequently, the assessee in the scheme approved by the Hon'ble Gujarat High Court has set off such brought forward losses and unabsorbed depreciation against the share capital reduction. After that, the assessee was not paying the tax either under the normal computation of income or MAT till the financial year 2006-07 because the entire taxable income was wiped out against the brought forward loss and unabsorbed depreciation. As such the assessee has adjusted the amount of unabsorbed depreciation being lower than the brought forward loss while working out the income under MAT till the financial year 2006-07. 6.2 The assessee again in the year under consideration adjusted the amount of unabsorbed depreciation amounting to ₹ 1,65,15,093.00 being lower than the brought forward loss while working out the income under MAT. But the same was disallowed by the authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment year commencing on and from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 1713 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses." 11. As observed earlier the assessee's net worth was wiped out due to huge loss and its case was referred to BIFR under the provisions of SICA. The rehabilitation scheme was sanctioned by the Board vide order dated 22.1.2008. The IDBI was appointed as operating agency. After sanction of the scheme, the IDBI would work as monitoring agency on behalf of the Board to oversee the implementation of scheme. Facts to this extent are not in dispute. It is also not in dispute that by virtue of clause (vii) of Explanation to 115JB, the assessee was not under obligation to pay tax on book profit under section 115JB till March, 2008, because, upto this date, its net worth was in negative. Due to this reason, in the Asstt. Year 2008-09, the assessee has claimed deduction of ₹ 21,77,73 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no losses as per the books of accounts. The ld. Revenue authorities below have not made reference to Parts-II and III of Schedule-VI to the Companies Act specifically for harbouring such a belief. The ld. AO has not backed his viewpoint on any provisions or rules. He proceeded with layman's angle. As far as reasons given by the ld. CIT(A) are concerned, we will revert to them in the later part of this order, because we have to deal with the stand of the assessee first. 13. Before adverting to the explanation of the assessee, it is pertinent to take note of primary purpose of preparing profit & loss account as contemplated in the initial provisions of Part-II of Schedule-VI, which reads as under: "PART II Requirements as to Profit and Loss Account 1. The provisions of this Part shall apply to the income and expenditure account referred to in sub-section (2) of section 210 of the Act, in like manner as they apply to a profit and loss account, but subject to the modification of references as specified in that sub-section. 2. The profit and loss account - (a) shall be so made out as clearly to disclose the result of the working of the company during the period co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rship firm, share of profit/losses in limited liability partnership. Fifth item is "expenses". Under the head "expenses", the company has to show cost of material consumed, purchases of stock-in-trade, change in inventories of goods, work-in-progress, employee benefits expenses, financial costs, depreciation and amortization and other expenses. Under the next two heads, exceptional items or extra-ordinary items are to be reported. Similarly, tax expenses are to be shown. Thus, emphasis of the assessee was that primary purpose of preparing the Profit and Loss Account is properly served, if a Company ensures, as far as possible, not to account to the credit of the Profit and Loss Account anything which is not concerned with the result of the working of the Company during the period covered by the Profit and Loss Account. 15. A perusal of the various heads, under which information are to be reported by the assessee under Part-II of Schedule-VI would indicate that companies are not required to account anything which cannot be regarded an income or profit/gain. As far as exceptional or extra-ordinary items are concerned, they are non-recurring items, which are like ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the case of Padmaraje R. Kadambande v. CIT (1992) 195 ITR 877 (SC), wherein it has been held by the Apex Court that Capital Receipts are not income within the definition of Sec 2(24) of the Act and hence are not at all chargeable under the I.T. Act. A receipt which is neither 'Profit' nor 'Income' and which does not have any element thereof embedded therein, cannot be part of 'profit' as per Profit & Loss account prepared in terms of Part II of schedule VI to Companies Act." 17. In para-4 on page no. 4 of this order, we have noticed the accounting treatment given by the assessee in the F.Y. ending on 31.3.2008 in consequence of rehabilitation scheme under the head "Effect of Rehabilitation Scheme." Apart from the seven items disclosed by the assessee, it has appended Note Nos. 7 & 9 of Schedule-II to the Annual account. At the cost of repetition, we would like to note the items disclosed by the assessee on this note. They read as under: '(Rs. in lacs) (i) Reduction of share capital (ii) Securities Premium Account - Adjustment of loss (iii) Capital Reserve Account - Adjustment of loss (iv) Capital Redemption Reserv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... down in Share Capital, utilization of reserves and waiver of dues by secured creditors are as disclosed in the Profit & Loss account under "Effect Rehabilitation Scheme'. 18. A perusal of the above would indicate that not a single item of alleged restructuring credit was of income nature. If that be so, then, how the loss can be set-off against such credits. The loss or debit balance of company can be set-off against the income. The income, on other words, means profit/gains of the business or profession. We have noticed the definition of income given in Part-II of the Schedule-VI. It contemplates that the income is increase in economic benefits during the accounting period in the form of inflows or enhancement of assets, decreases of liability that result in increase in equity, other than those relating to contributions from equity participants. This definition also excludes those equities which came from the contribution of the equity participants. In other words, if the value of equity enhances by virtue of inflows or decrease of liabilities, only that components is to be considered as income. If the value of equity increases by virtue of fresh capital contribution fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gned order passed u/s 263 of the Act. The ld. CIT was of the opinion that there was no amount which could be allowed as deduction under clause (iii) of Explanation to section 115JB(2) of the Act as there was no loss balance in the profit and loss account. It is not in dispute in the instant case that the assessee company suffered loss continuously since F.Y. 2000-01 till the immediately preceding previous year. However, the assessee adjusted the figure of accumulated loss of ₹ 3,58,75,731/- with the paid-up capital and balance in profit and loss account was not reflecting any loss. The assessee submitted year-wise position as under before the ld. CIT which was not controverted by the ld. CIT or by the ld. D.R: F.Y. Business loss Unabsorbed depreciation 2000-01 6,516,294 5,038,745 2001-02 8,616,502 4,568,920 2002-03 8,300,582 4,658,373 2003-04 2,971,925 8. It is not in dispute that the above figures are as per audited books of account of the assessee for the immediately preceding four years. From the above, it is observed that the assessee has continuously suffered loss as per its books for the last four years and out of which in the first year the ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount or balance sheet. The said clause (iii) cannot be read to mean that if the loss suffered in a year and unabsorbed depreciation of that year are not kept separately and shown distinctly in the balance sheet, then no deduction for the said loss or depreciation can be allowed in the succeeding years in computing the book profit. There is no such further legal requirement that the loss should appear in the balance sheet of the succeeding year also and hence such requirement cannot be imposed by any authority. In our considered opinion, the loss or unabsorbed depreciation of one year can be set-off against the profit of the subsequent year only and till such set-off, the amounts are carried forward to the subsequent year, or in other words, are brought forward in the subsequent year from earlier year and are available for set-off as per provisions of clause (iii) of section 115JB(2) of the Act. In the instant case, it is observed that the assessee has suffered loss continuously in the last four years. No material has been brought on record that such loss was set-off against any profit of the subsequent year in determining the book profit of the assessee company after the year in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be prepared in consequent to the requirement under these provisions. Parts-II and III of Schedule-VI nowhere envisage that the items which are not of income in nature are required to be recognized under the head "income" in the profit & loss account. The simple logic is how an entity or person can be put under a tax liability on its own on capital contribution? If somebody has a reserve and surplus and for the purpose of availing loan or for some other reasons, demonstrate the set-off of liability, would that mean that department would treat that reserve and surplus as income and put the entity under the tax liability? 20. The next reason assigned by the ld. CIT(A) is that in the return of income, the assessee itself admitted that MAT calculation is not as per the books of account. If that be so, then, such a claim is not admissible. In our opinion, this reason is not sustainable, because subclause (a) of section 115JB(1) contemplates that book profit ought to have been worked out as per the Part-II and Part-III of Schedule-VI. If that has not been worked out, then, the AO has right to tinker with the computation of book profit and compute it in accordance with Part- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicable in the income tax proceedings, but where the facts running in different assessment years have not changed, then, consistent approach ought to be adopted. The Income Tax Officer is free to take different opinions in different assessment years, but he should have disclosed the reasons why he is taking a different stand in different years. In the present case also, the ld. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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