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2016 (6) TMI 525 - ITAT AHMEDABAD

2016 (6) TMI 525 - ITAT AHMEDABAD - TMI - Disallowance of deduction of alleged accumulated unabsorbed depreciation of earlier years while computing the book profit for the purpose of section 115JB - Held that:- 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 profi .....

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ssee to the profit & loss account against accumulated profit and loss/debit balance, while giving effect to the scheme sanctioned by the BIFR would not extinguish alleged loss and depreciation from 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 .....

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AV, JUDICIAL MEMBER AND SHRI MANISH BORAD, ACCOUNTANT MEMBER For The Assessee : Shri J.P. Shah For The Revenue : Shri R.I. Patel, CIT-DR ORDER PER RAJPAL YADAV, JUDICIAL MEMBER: The assessee is in appeal against the order of the ld.CIT(A)-II, Surat dated 30.10.2015 for the Asstt.Year 2012-13. 2. Though the assessee has taken five grounds of appeal, but its grievance revolves around a single issue i.e. whether the ld.CIT(A) has erred in confirming the action of the AO in disallowing deduction of .....

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on 143(1) of the Act, and thereafter, the case of the assessee was selected for scrutiny assessment, and notice under section 143(2) of the Income Tax Act was issued on 8.8.2013 which was served upon the assessee. On scrutiny of the accounts, it revealed to the AO that the assessee has shown its income as under: PARTICULARS AMOUNT Business Income -1,68,97,684 Long term capital gain 11,85,91,872 Short term capital gain 1,30,95,761 Total 11,47,89,949 Less: Unabsorbed depreciation 11,47,89,949 Net .....

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51,00,602/- instead of NIL book profit shown by the assessee. The ld.AO has reproduced the show cause notice in para-4 of page no.2 of the assessment order. In response to the show cause notice, the assessee has filed a reply which has also been noticed by the AO on page no.3 to 18 of the assessment order. In brief, the stand of the assessee before the AO was that the assessee-company was carrying on business of polyester chips and polyester yarn at its plant at Jolwa, Surat. Because of unavoida .....

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operating agency under section 17(3) of the SICA to examine its viability and formulate the rehabilitation scheme of the assessee-company. Vide its order dated 22.2.2008, the Board has sanctioned the rehabilitation scheme and appointed IDBI as monitoring agency on behalf of the Board to oversee the implementation of the scheme. In the F.Y.2007-08, relevant to the Asstt.Year 2008-09, a rehabilitation account was opened to give effect to the order of the BIFR. In rehabilitation scheme account, al .....

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Appraising the AO with the provision of section 115JB, it was contended by the assessee that adjustment of debit balance of profit and loss account by transferring it to rehabilitation scheme account to the extent of credit balance available therein was made on the recommendation of the BIFR. It was not in accordance with the Schedule-VI of the Companies Act. The amounts for the purpose of computing under section 115JB, the computation of book profit was required to be made as per Part-II and II .....

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n conformity with the requirement of company law. Therefore, while preparing the accounts, under Schedule-VI of the Companies Act, the assessee has considered the brought forward loss as well as unabsorbed depreciation, under clause (iii) of Explanation to section 115JB (2) it has reduced the unabsorbed depreciation of earlier years. The assessee has appraised the AO with regard to the amounts which were of capital nature, and it was transferred to the credit of rehabilitation account. The AO ha .....

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share capital 6,035.80 (ii) Securities Premium Account - adjustment of loss 4,409.91 (iii) Capital Reserve Account - Adjustment of loss 153.61 (iv) Capital Redemption Reserve Account - Adjustment loss 10.00 (v) Secured loans - balance waived Rs.4,094.38 (vi) Share forfeiture account - unpaid allotment monies and call in arrears written off (3.95) Total 14,699.75 8. Ultimately the credit balance in Rehabilitation Account was used to set off debit balance of Rs. of profit & loss account by way .....

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, the assessee has contended that right from assessment year 2008-09, it has been reducing the brought forward loss/ unabsorbed depreciation, whichever is lower, from the book profit as per clause (iii) and (vii) of Explanation to section 115JB (2) of the Income Tax Act. The AO has allowed such claim of the assessee in the past. The ld.AO was not satisfied with contentions of the assessee. He did not deal with each explanation of the assessee elaborately, rather, in sweeping manner, he has obser .....

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bserved that as far as the principle of consistency is concerned, res judicata is not applicable to the income tax proceedings, and if the AO is able to point out specific circumstances, which can demonstrate that earlier year s view was contrary to law, then, he was justified to take a different view in subsequent year. On merit, he was of the opinion that once unabsorbed deprecation/loss were form part of the profit & loss account, and such debit balance was set off against the credit bala .....

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ciation or loss, whichever was lower under clause (iii) of the Explanation to section 115JB(2) of the Act, he put reliance upon the judgment of the Hon ble Supreme Court in the case of CIT Vs. Excel Industries, reported in 358 ITR 295. He further contended that in Asstt.Year 2010-11, the AO has allowed reduction of such unabsorbed depreciation from the book profit for the purpose of section 115JB. This action of the AO was set aside by the Commissioner while exercising power under section 263 of .....

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absorbed deprecation, he relied upon the written submissions filed by the assessee before the ld.CIT(A) as well as before the AO. He pointed out that both these authorities have reproduced the written submission filed by the assessee. Copy of the written submissions filed before the CIT(A) is available at page nos.268 to 297. He also pointed out that the assessee sought an opinion on this issue from G.K. Chokshi & Company, and this company has rendered its opinion on the queries of the asses .....

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ons and gone through the record carefully. In our opinion, the controversy required to be silenced at the end of the Tribunal, is whether restricting credits credited to the profit & loss account against accumulated profit & loss debit balance would mean that the alleged accumulated loss have been absorbed, and not available to the assessee for claiming deduction under clause (iii) of Explanation to section 115JB (2). Section 115JB has a direct bearing on the controversy, therefore, it i .....

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tion [1].-For the purposes of this section, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by- (a) (b) (c) (d) (e) (f) (g) (h) i) if any amount referred to in clauses (a) to (i) is debited to the profit and loss account and as reduced by, (iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account. Explanation.-For the purposes of th .....

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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 .....

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d to section 115JB of the Act. The AO has allowed this deduction in an assessment order passed under section 143(3) r.w.s. 153A of the Income Tax Act. From the Asstt.Year 2009-10, the assessee had expected to come out from the provisions of SICA, because, its net-worth was going to be positive, and therefore, it will not be entitled to exemption under clause (vii) of Explanation to section 115JB of the Income Tax Act. It is also pertinent to mention here that in the Asstt.Year 2009-10, the asses .....

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ssessee to reduce the amount of book profit by the amount of brought forward loss or depreciation whichever is lower. There is no dispute between the parties qua this interpretation also. Clause (a) of sub-section (2) of section 115JB contemplates that every assessee being a company, other than referred to clause (b) shall for the purpose of this section, prepare its profit & loss account in accordance with the provisions of Part-II and Part-III of Schedule-VI of the Companies Act, 1956. The .....

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nce would be considered as wipe out from the profit & loss account, and therefore, no loss/unabsorbed deprecation are available for reduction under clause (iii) of Explanation to section 115JB (2). In other words, the accumulated loss has been reduced from the restructuring credits in the profit & loss accounts and can be said that there are no losses as per the books of accounts. The ld.Revenue authorities below have not made reference to Part-II and III of Schedule-VI to the Companies .....

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ovisions 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 c .....

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:- …… …….. (xii)(a) …… (b)Profits or losses in respect of transactions of a kind, not usually undertaken by the company or undertaken in circumstances of an exceptional or non-recurring nature, if material in amount. 14. Apart from the above, we have pursed the guidance note issued by the Institute of Chartered Accountants of India on the revised Schedule-VI to the Companies Act, 1956. It has been laid down in the guidance note at serial no.9, page no.5 .....

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ult in increase in equities, other than relating to contributions from equity participants. Similarly, expression expenses has been defined to mean decrease in economic benefits during the accounting period in the form of outflows, the depletion of assets or increase of liabilities that result in decreases in equities, other than those relating to distributions to equity participants. This guidance note provides that while preparing statement of profit & loss account under Part-II, one has t .....

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any 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 possi .....

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ed, they are non- recurring items, which are likely to distort true income of the company during the period covered by the profit & loss account. Part-II of the Schedule -VI provides presentation of such extra ordinary items by way of a separate disclosure. The case of the assessee is that if by way of any mistake or for some other reasons, if any part, which is not operating income of the assessee, is accounted in the profit & loss account, then, those provisions do not require that the .....

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ance Note issued by Institute of Chartered Accountants of India on Schedule-VI, provisions of Part-II of Schedule-VI and AS-9. At the cost of repetition, we would refer clause (3) of Part-II. 3. The profit and loss account shall set out the various items relating to the income and expenditure of the company arranged under the most convenient heads ; and in particular, shall disclose the following information in respect of the period covered by the account :- This clause contemplates that the pro .....

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, Jaipur Bench, (as relied upon by the ld.counsel for the assessee) in the case of ACIT Vs. Shree Cement Ltd. rendered in ITA No.635/JP/2010 and others. In this case, the assessee has received capital subsidy. The assessee excluded capital receipts from profit & loss account. The AO has included it for the purpose of section 115JB. The Tribunal observed as under: 13.2 Our above view also finds support from the decision of Hon ble Apex Court in the case of Padmaraje R. Kadambande Vs. CIT (199 .....

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g 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 No.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: (i) Reduction of share capital 6,035.80 (ii) Securities Premium Account - adjustment of loss 4,409.91 .....

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o the Profit and Loss Account. 9. The Company is registered as a sick company; with the Board for Industrial and Financial Reconstruction (BIFR) under the Sick Industrial Companies. (Special Provisions) Act 1985. The Hon'ble Board, has sanctioned a rehabilitation scheme resting with its order dated 22nd January, 2008 envisaging various relief and concessions ( Rehabilitation Scheme ) Further, the sanctioned Rehabilitation Scheme interalia provides for restructuring of debts through One Time .....

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(principal and interest) amounting, to ₹ 81.77 crores. As per the approved Rehabilitation Scheme, the dues of secured creditors have been completely settled and the secured creditors have waived-off the aggregate: balance ₹ 40.94 crores on principal, interest, penal interest and other charges upon repayment bf OTS amount.. The promoters have contributed ₹ 3.67 crores towards additional working capital. In accordance with the rehabilitation scheme the Company-has issued 15,50,0 .....

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of write-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 .....

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f 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 from the equity participants, then that would not be treated as income. The items in the restructuring credit came from the reserve, capital contribution of the equity participants etc. Therefore, there was no element of income involved in the alleged restructuring credit. In such situation, th .....

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planation to Section 115JB(2). The facts on the basis of which this claim was disallowed by the AO was that as per scheme of amalgamation approved by the shareholder and the Hon ble Madras High Court, the company reduced the paid-up capital, which is not represented by the assets, because the company had incurred losses in earlier years. Accordingly, the company has transferred the entire balance of profit and loss account amounting to ₹ 3,58,75,731/- to paid-up equity capital account. The .....

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inst its capital asset. When the dispute travelled to the Tribunal, the Tribunal has allowed the claim of the assessee, and discussion made by the Tribunal reads as under: 7. We have heard the rival submissions and perused the orders of the lower authorities and the material available on record. We find that in the instant case, the original assessment was completed u/s 143(3) on 28.12.2007 wherein book profit u/s 115JB was computed at NIL after allowing set off of brought forward loss or deprec .....

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evious 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 Total 2000-01 6,516,294 5,038,745 11,555,039 2001-02 8,616,502 4,568,920 13,185,422 2002-03 8,300,582 4,658,373 12,958,955 2003-04 2, .....

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as no brought forward loss or unabsorbed depreciation as per books in the current year is, in our considered opinion, an absurdity. It seems that the ld. CIT is of the opinion that unless there is a debit balance in the profit and loss account, the assessee cannot be allowed the benefit of clause (iii) Explanation to Section 115JB(2). In our considered view, the phrase loss brought forward and phrase debit balance in profit and loss account are two different and does not convey the same meaning. .....

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profit for determining the amount to be carried forward or the amount remaining unabsorbed. The loss or unabsorbed depreciation is to be determined with reference to books of account in contra-distinction to the loss of unabsorbed depreciation arrived at from normal computation of total income under sections 72 to 74A of the Act or u/s 32 of the Act. Herein, it may be noted that phrase used is books of account and not profit and loss account or balance sheet . Profit and loss account, balance s .....

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available as per books of account may not always be necessarily apparently visible from either the profit and loss account 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 .....

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ction 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 which such loss was suffered. Thus in our considered opinion, such loss was available for set off during the year under consideration for determining the book profit as per provisions .....

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neering Ltd. [2010] 195 Taxman 353 [Del]. 19. Now let us deal with the reasoning given by the ld.CIT(A). The first reason assigned by the ld.CIT(A) is that the assessee has claimed maintenance of separate ledger for giving effect the credits in the rehabilitation scheme. But according to the ld.CIT(A) auditors have not given any such finding nor provided that two sets of profit & loss account are being maintained. Therefore, according to the ld.cousnel for the assessee, once the assessee has .....

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the assessee, as discussed earlier was that accounts for the purpose of giving effect the scheme of BIFR were not required to be finalized in consonance with Part-II and III of Schedule-VI. Therefore, even if the assessee has shown the alleged set off of debit balance against the restructuring credits brought in the accounts, for the purpose of balance sheet and presentation, that does not mean that the assessee has been denuded to say that its accounts for subsequent period would not be prepare .....

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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 ac .....

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losure in the column, one has to find whether the book profit computed by the assessee and claimed along with return is in consonance with Part-II and Part-III of Schedule-VI to the Companies Act. 21. Next reason assigned by the ld.Commisisoner is that actual book of accounts show separate ledger accounts in respect of the brought forward loss and unabsorbed depreciation. According to the ld.CIT(A), the adjustment of debit balance in the profit & loss accounts credits in the rehabilitation s .....

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d be explained by simple example. Depreciation under the Companies Act can be claimed according to the straight-line method or as per WDV. But for the purpose of computation of income under the Income Tax Act, depreciation is to be worked out as per the WDV. The rate of depreciation under the Income Tax Act is higher than the one prescribed under the Companies Act. Can the ld.Commissioner allege that since you have claimed a lower depreciation, according to the straightline method, while prepari .....

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ut this aspect has been considered by the Hon ble Supreme Court in the case of CIT Vs. Excel Industries Ltd. (supra) and Radhasoami Satsang Vs. CIT, 193 ITR 321 (SC). In a number of authoritative pronouncements, it has been held that though the principle of res judicata is not strictly 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 .....

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