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2022 (5) TMI 1275 - ITAT CHENNAIMAT 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.
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