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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 ..... t. 2. Under section 115JB, where in the case of an assessee being a company, the income-tax payable on the total income as computed under the "Act" in respect of any previous year relevant to the assessment year commencing on or after April 1, 2001, is less than 7½ per cent. of the book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be at 7½ per cent. Sub-section (2) of section 115JB requires every assessee, for the purpose of the said section, to prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 subject to certain adjustments set out therein. The Explanation under sub-section (2) defines "book profit" and requires the net profit shown in the profit and loss account as prepared under sub-section (2) to be reduced by the amount of loss brought forward or unabsorbed depreciation whichever is less, amongst various other adjustments. The provisions of the Explanation shall continue to apply for the subsequent years so long as the amount of loss brought forward or un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (approximately) for the financial year 2003-04 (assessment year 2004-05) was reduced by the profit attributable to export turnover amounting to Rs. 233.45 crores arriving at the balance profit of Rs. 1,313.55 crores. This was further reduced by the brought forward busi ness loss of Rs. 1,234 crores (being lesser than the unabsorbed depreciation of Rs. 3,227 crores) and the taxable income was arrived at Rs. 79.55 crores for the financial year 2003-04 (assessment year 2004-05). On the basis of the above working, the Assessing Officer concluded that the business loss to be carried forward was nil for computing the "book profit" for the financial year 2004-05 (assessment year 2005-06) and hence no deduction was called for on account of the unabsorbed depreciation. Accordingly the projected profit of Rs. 2,250 crores was adopted as the book profit for the financial year 2004-05 (assessment year 2005-06) for levy of minimum alternate tax. 6. On the facts stated above, the applicant has referred the following questions for ruling by the Authority : (a) Whether, in a case to which section 115JB applies, the applicant has the option to set off the current year's profit against the loss br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany, and estimated profit of Rs. 2,250 crores for the period 2004-05. The applicant is liable for payment of income-tax under the provisions of section 115JB for the accounting years 2003-04 and 2004-05, there being no dispute regarding computation of tax for the accounting years 2002-03, where the tax liability is nil. That the net profit of Rs. 521 crores for the year 2002-03 is required to be reduced by brought forward loss of Rs. 1,755 crores which is lesser than the aggregate unabsorbed depreciation of Rs. 3,227 crores. And accordingly the loss to be carried forward for the next accounting year would be Rs. 1,234 crores (1,755-521) and unabsorbed depreciation of Rs. 3,227 crores will remain unaltered. That the applicant while computing the minimum alternative tax (MAT) under section 115JB has followed the same method as adopted by the Revenue, however, for the purpose of carry forward of business loss/depreciation, the applicant has altogether changed the manner by setting off the current year's profit of Rs. 521 crores against unabsorbed depreciation of Rs. 3,227 crores in its books of account, instead of reducing the profit by accumulative business loss of Rs. 1,755 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 2,706 cr. Balance unabsorbed book loss carried forward to the next f.y. 1,755 cr. Financial year 2003-04 (assessment year 2004-05) Book profit as per audited accounts 1,547 cr. Book profit as per audited accounts 1,547 cr. As reduced by : As reduced by : (i) Brought forward unab sorbed business dep. (-) Rs. 3,227 cr. (i) Brought forward unab sorbed business dep. (-) Rs. 2,706 cr. or or (ii) unabsorbed loss (-) Rs. 1,234 cr. (ii) unabsorbed loss (-) Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... retation 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 profit, in the absence of any specification therein as to the manner in which business loss or unabsorbed depreciation has to be adjusted. In the absence of any statutory prohibition as regards the methodology adopted by the applicant, it cannot be termed as a design to reduce the tax liability. Courts have consistently held that so long as an assessee falls in line with the express statutory provisions, the transaction cannot be treated as a design, merel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. It can exercise whichever option is beneficial to it. 11. The Revenue, on the other hand, has vehemently argued that if there is current profit as per the profit and loss account then the same would be reduced by either the book loss or the book depreciation, whichever happens to be less. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 adversely affect the capital of the concerned company under this deeming provision. The applicant has strongly relied on the decision of the honourable Supreme Court in the case of Surana Steels P. Ltd. v. Deputy CIT [1999] 237 ITR 777, wherein it was held that the term "loss" in section 205 of the Companies Act must be understood to mean loss after taking into account the depreciation. Subsequent to this decision of the honourable apex court the law was amended by introducing section 115J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itten 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. Both these depreciation schedules, under the Companies Act and under the Income-tax Act, respectively, would run parallel, each undergoing change year after year as per its own prescribed rules with reference to the rate of depreciation allowable under the respective statutes. 16. Computation of tax liability in terms of the provisions of section 115JB would be an example of another parallel stream. Computation of income (as affected by the rate of depreciation prescribed) would be quantifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il C.F. unabsorbed depre ciation 1985 3,80,000 Year 1986 Net loss as per books before depreciation (-) 10,00,000 Business loss (-) 10,00,000 Less Less : Carried forward business loss for 1986 to the extent adjusted 2,00,000 2,00,000 Assessed income Application of section 115J Profit before depreciation 10,00,000 book depreciation 2,00,000 8,00,000 deduction under section 205(2) 2,00,000 6,00,000 Out of the amount whichever is less : 1984 : Business loss 3,00,000 1986 : Business loss 10,00,000 Total loss 13,00,000 1986 : Depreciation 2,00,000 Assessable income 30% of Rs. 6 lakhs, i.e, Rs. 1.8 lakhs. Amount to be carried forward as per sub-section (2) of section 115J : 1984 : Unabsorbed depreciation 3,80,000 1986 : Business loss 8,00,000 Unabsorbed depreciation 4,00,000 These amendments will come into force with effect from April 1, 1988, and will accordingly, apply in relation to the assessment year 1988-89 and subsequent years. [Section 43 of the Finance Act, 1987".] 17. The juri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1981] 131 ITR 597 (SC), it was pointed out by this court that not only are the circulars and instructions, issued by the Central Board of Direct Taxes in exercise of the power under section 119, binding on the authorities administering the tax department, but they are also clearly in the nature of contemporanea expositio furnishing legitimate aid to the construction of the Act. The rule of contemporanea expositio is that 'administrative construction (i.e., contemporaneous construction placed by administrative or executive officers charged with executing a statute) generally should be clearly wrong before it is overturned ; such a construction, commonly referred to as practical construction, although non-controlling, is nevertheless entitled to considerable weight, it is highly persuasive' (Crawford on Statutory Construction, 1940 edition, as in supra note 130). The validity of this principle was recognized in Baleshwar Bagarti v. Bhagirathi Dass [1908] ILR 35 Cal 701, 713, where the Calcutta High Court stated the rule in the following words : 'it is a well-settled principle of interpretation that courts in construing a statute will give much weight to the interpretation put up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceding year. Starting from any other point, as attempted by the applicant, would be against the principles of consistency and regularity. Section 115JB does stipulate that computa tion under the section should start from accounts prepared under the Companies Act for the relevant previous year, but that is only for the purpose of working out the net profit under sub-section (2). Further, given the specific provisions of sub-clause (iii) of the Explanation the net profit so arrived at has to be reduced by the book loss or the book depreciation (whichever is less) of the preceding years as per accounts prepared under the Companies Act and as modified by the reduction, if any, made under section 115JB for earlier year or years. If the provisions of section 115JB treat the book loss before depreciation and the depreciation claim itself as distinct, then the accounts prepared under the Companies Act must be modified, wherever necessary, to comply with the provisions of section 115JB, for computation of minimum alternate tax. 21. In this regard the observations of Justice B. N. Kirpal of the Delhi High Court (as his Lordship then was) in the case of National Thermal Power Corporation Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 115J. For the sake of facility the relevant portion of the decision (quoted by the applicant) is reproduced hereunder (page 722) : "Sub-section (2), with which we are concerned, says that the provisions of sub-section (1) shall not affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under : (a) sub-section (2) of section 32 ; or (b) sub-section (3) of section 32A ; or (c) clause (ii) of sub-section (1) of section 72 ; or (d) section 73 ; or (e) section 74 ; or (f) sub-section (3) of section 74A ; or (g) sub-section (3) of section 80J). Sub-section (2) is only a saving provision. It provides that determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions, enumerated above, will have to be made unaffected by the provisions in sub-section (1) of section 115J. It is argued that having regard to sub-section (1), determination of the amounts to be carried forward of losses, etc., referred to above, three propositions are possible, viz. (i) Once the income is determined under sub-section (1) in an assessment ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : (a) No. The applicant does not have the option to reduce the current year's profit by the loss brought forward or unabsorbed depreciation (for the purpose of carry forward under section 115JB), in its accounts, in a manner different from the manner adopted for determination of "book profit" under section 115JB. (b) No. The applicant does not have the discretion to reduce the current year's profit either by the loss brought forward or unabsorbed depreciation. The lesser of the two is required to be reduced from the current year's income. After making the reduction in one year, the applicant cannot adopt a different method in the subsequent years. The applicant cannot reduce the current year's profit partly by the business loss brought forward and partly by unabsorbed depreciation. (c) No. The applicant having disclosed the aggregate loss comprising of loss brought forward and unabsorbed depreciation as a consolidated figure in its profit and loss account, for the purpose of calculating the book profit under section 115JB is required to bifurcate such consolidated loss into loss brought forward and unabsorbed depreciation but cannot avail of the benefit of reduction envisag ..... X X X X Extracts X X X X X X X X Extracts X X X X
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