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2022 (5) TMI 1275 - AT - Income TaxMAT computation u/s 115JB - Adjustment of resultant gains / losses of the amalgamation - write off of investments consequent to reduction in capital of the subsidiary, in computing book profits under provisions of section 115JB of the Act - Whether section 115JB is a self-contained code and hence only specified adjustments can be added or excluded from book profits? - HELD THAT - FFL got merged with the assessee w.e.f. 01.04.2008 and the amalgamation was accounted for by the assessee on Pooling of interest method. According to this method, the assets and liabilities are recorded at Book Value. The resultant gains / losses of the amalgamation have been adjusted through Capital Reserves / General Reserves Surplus and the same have not been routed through Profit Loss Account. This would show that the transactions were capital in nature. M/s FFL was having 100% subsidiary in the name of Forbes Technosys Ltd. (FTL) wherein it held 210 Lacs equity shares of Rs.10/- each. As a result of amalgamation, the shares of FTL were held by the assessee and FTL became direct subsidiary of the assessee. The Book Value of the investments was Rs.2061.17 Lacs. Subsequently a special resolution was passed by the equity shareholders of FTL on 05.01.2010 approving the reduction of paid-up share capital by cancelling the equity shares against debit balance of Rs.1710.28 Lacs standing in the Profit Loss Account as on 31.03.2009. It could be seen that there was existing accumulated losses to the extent of Rs.1710.28 Lacs as on 31.03.2009 which were sought to be wiped-off by cancellation of shares. Accordingly, 1,71,02,800 shares of Rs.10/- each got cancelled and extinguished leaving remaining equity shares numbering 38,97,200 with the assessee Share Capital was reduced with a corresponding reduction in the existing accumulated losses and the transaction was a mere Book-entry and nothing more. The assessee wrote-off the amount of Rs.1682.91 Lacs in the Profit Loss Account and added back the same while computing the income under normal provisions. However, while computing Book-Profits u/s 115JB, the assessee does not add back the same on the ground that it is actual loss We concur with the findings in the impugned order that the assessee s ownership in FTL remains the same i.e., 100% before and after the cancellation of shares and nothing moves from the coffers of the assessee company on this transaction. Therefore, the write-off would be nothing but a notional loss of subsidiary company. The decision of Special Bench Mumbai Tribunal in Bennett Coleman Co. Ltd. 2011 (9) TMI 1 - ITAT MUMBAI clearly support this proposition wherein it was held that loss on reduction of equity capital could at best be a notional loss. The shareholders percentage of shareholding before and after the reduction of share capital remained the same and the loss was notional loss. Upon reduction of capital, nothing moves from the coffers of the company. Accordingly, the loss was held to be notional loss. In the present case, the loss is not actual loss but the same is specifically to be added to Book Profits as per Explanation (1)(d) of Section 115JB(2) of the Act. We find that Mumbai Tribunal in Shivalik Venture Private Ltd 2015 (8) TMI 979 - ITAT MUMBAI held that the profit arising on transfer of capital asset by assessee to its wholly owned subsidiary company is liable to be excluded from the net profit. It was held by the bench that for the purpose of Section 115JB, net profit shown in profit and loss account should be understood as net profit arrived at after giving effect of notes, if any, given in Notes to Accounts. Accordingly, if an item of receipt which does not fall under definition of 'income' at all, the same would fall outside purview of computation provisions of Act and therefore, would not be includible in book profit' u/s 115JB. Applying the analogy, a reverse conclusion could be drawn that such losses were not to be deducted while computing Book-Profits u/s 115JB. Appeal dismissed.
Issues Involved:
1. Disallowance of investments written off of Rs. 16,82,92,557 in computing book profits under provisions of section 115JB of the Act. Issue-wise Detailed Analysis: 1. Disallowance of investments written off of Rs. 16,82,92,557: Assessment Proceedings: The assessee, a resident corporate entity engaged in financial services and investments, had an assessment framed for AY 2010-11 under section 143(3) on 20.03.2013. The Assessing Officer (AO) increased the book profits by Rs. 16,82,92,557, representing the write-off of investments in a subsidiary. This write-off was treated as a provision for loss, and since the tax payable under section 115JB was higher than the normal computation, the assessee was directed to pay tax accordingly. The assessment order did not discuss this issue in detail, but the book profits under section 115JB were computed in the income computation. Appellate Proceedings: The assessee explained that Forbes Finance Ltd. (FFL) merged with it effective 01.04.2008, and as a result, FFL's wholly-owned subsidiary, Forbes Technosys Ltd. (FTL), became a direct subsidiary of the assessee. FTL's equity shareholders passed a resolution on 05.01.2010 to reduce the paid-up share capital by canceling shares against a debit balance of Rs. 1710.28 Lacs in the Profit & Loss Account. This reduction was approved by the Bombay High Court on 26.02.2010, resulting in the cancellation of 1,71,02,800 shares, leaving 38,97,200 shares with the assessee. Consequently, the assessee wrote off Rs. 16,82,91,552 in investments and debited it to the Profit & Loss Account. The AO treated this as a provision for losses of subsidiary companies under Explanation (1)(d) for Section 115JB. The assessee contended that the write-off was actual and not a provision for losses, alternatively arguing it was an ascertained liability. They relied on the Supreme Court decision in Apollo Tyres Ltd. (255 ITR 273), asserting that the AO had no jurisdiction to alter the profit shown in the Profit & Loss Account except as provided in the Explanation to Sec.115JB. CIT(A) Findings: The CIT(A) upheld the AO's decision, relying on the Special Bench Mumbai Tribunal's decision in Bennett Coleman & Co. Ltd. V/s Addl. CIT (141 TTJ 777), which held that loss on reduction of equity capital is a notional loss. The CIT(A) noted that the shareholders' percentage of shareholding remained the same before and after the reduction of share capital, and no actual loss occurred. The decision in Shivalik Venture Private Ltd V/s DCIT (173 TTJ 238) was also referenced, where it was held that profit from transferring capital assets to a wholly-owned subsidiary is excluded from net profit. Applying this logic, the notional loss from capital reduction should not be factored into the computation of book profits under section 115JB. Tribunal's Findings and Adjudication: The Tribunal agreed with the CIT(A) that the write-off was a notional loss since the assessee's ownership in FTL remained unchanged at 100% before and after the share cancellation. The transaction was a mere book entry, and nothing moved from the company's coffers. The Tribunal referenced the Special Bench Mumbai Tribunal's decision in Bennett Coleman & Co. Ltd. V/s Addl. CIT, supporting the notion that loss on equity capital reduction is notional. The Tribunal also noted that the decision in M/s PVP Corporate Parks Private Ltd. V/s DCIT did not apply since it involved an actual sale of fixed assets, unlike the present case. The Tribunal further referenced the Mumbai Tribunal's decision in Shivalik Venture Private Ltd V/s DCIT, which held that profits from transferring capital assets to a wholly-owned subsidiary are excluded from net profit. Applying this analogy, notional losses should not be deducted when computing book profits under section 115JB. Conclusion: The Tribunal upheld the CIT(A)'s findings, dismissing the assessee's grounds. The appeal was dismissed, confirming that the notional loss from the capital reduction of equity shares of the wholly-owned subsidiary should not be factored into the computation of book profits under section 115JB. Order Pronounced: The appeal was dismissed on 24th May 2022.
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