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No option to set off current year’s profit against loss brought forward under 115JB: Advance Ruling

AIT News Network

NEW DELHI. Authority for Advance Rulings (Income Tax) vide a recent landmark ruling dated 19^th July 2006

AIT-2006-80-AAR has ruled that in a case to which Section 115JB applies, the applicant has no option to set off the current year’s profit against the loss brought forward or unabsorbed depreciation, in its accounts, in a manner different from the manner adopted for determination of “book profit” under Section 115JB

THE FACTS: At the end of the financial year 2001-02 (A.Y. 2002-03), the applicant had business loss of Rs. 1,755.00 crores (approximately) and unabsorbed depreciation of Rs. 3,227 crores (approximately) eligible to be carried forward. During the financial year 2002-03 (A.Y. 2003-04) the applicant had a net profit to Rs. 521 crores (approximately). In terms of Sub-sec (2) of Section 115JB the net profit has to be reduced by the business loss or unabsorbed depreciation whichever is less and if the said adjustment is made there would be no book profit liable for assessment u/s 115JB for the Assessment Year 2003-04.

For the financial year 2003-04 (A.Y. 2004-05) the applicant reported a profit of Rs. 1547 crores (approximately). During the said year, the total brought forward loss of Rs. 4461 crores (approximately) shown in the profit and loss account by the applicant comprises of business loss of Rs. 1755 crores (approximately) and unabsorbed depreciation of Rs. 2706 crores (approximately), the profit of Rs. 521 crores (approximately) for the financial year 2002-03 (A.Y. 2003-04) having been adjusted against the unabsorbed depreciation. It is stated by the applicant that, in terms of sub-sec (2) of Section 115JB current year’s profit has to be reduced by the business loss or unabsorbed depreciation, whichever is less and accordingly the book profit for the financial year 2003-04 (A.Y. 2004-05) would be nil. The applicant, therefore, would not be liable to pay any advance tax for the assessment year 2004-05.

AO called upon the applicant to make an ad hoc payment of around Rs. 60 crores towards estimated advance tax liability and with a view to cooperate with the Department the applicant paid Rs. 60 crores in March 2004, without prejudice to its claim that it is not liable for payment of minimum alternate tax for the A.Y. 2004-05. The AO proceeded on the basis that the profit of Rs. 521 crores (approximately) for the financial year 2002-03 (A.Y. 2003-04) is adjusted against the business loss of Rs. 1755 crores (approximately) leaving a balance business loss of Rs. 1234 crores (approximately). The net profit of Rs. 1547 crores (approximately) for the financial year 2003-04 (A.Y. 2004-05) was reduced by the profit attributable to Export turnover amounting to Rs. 233.45 crores arriving at the balance profit of Rs. 1313.55 crores. This was further reduced by the brought forward business loss of Rs. 1234 crores (being lesser than the unabsorbed depreciation of Rs. 3227 crores) and the taxable income was arrived at Rs. 79.55 crores for the financial year 2003-04 (A.Y. 2004-05). On the basis of the above working, the AO concluded that the business loss to be carried forward was nil for computing the “book profit” for the financial year 2004-05 (A.Y. 2005-06) and hence no deduction was called for on account of the unabsorbed depreciation. Accordingly the projected profit of Rs. 2250 crores was adopted as the book profit for the financial year 2004-05 (A.Y. 2005-06) for levy of minimum alternate tax.

QUESTIONS BEFORE 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 brought forward or unabsorbed depreciation, in its accounts, in a manner different from the manner adopted for determination of “book profit” under Section 115JB?

(b) Whether the applicant has discretion to set off the current year’s profit, either against the loss brought forward or unabsorbed depreciation? In the event of such set-off being made by the applicant in one year, can it in the subsequent years adopt a different method of set-off? Can the applicant set off the current year’s profit partly against the business loss brought forward and partly against unabsorbed depreciation in such proportion at it might decide?

(c) Whether the applicant having disclosed the aggregate loss comprising loss brought forward and unabsorbed depreciation as a consolidated figure in its Profit & Loss account, can for the purpose of calculating the book profit under Section 115JB bifurcate such consolidated loss into loss brought forward and unabsorbed depreciation and avail the benefit of reduction envisaged under Sub-section (2) of Section 115JB in manner most beneficial to it?

(d) Whether it is open to the applicant to set off the current year’s profit against the loss brought forward or unabsorbed depreciation in a manner most beneficial to it subject, however, to the provisions of Sub-section (2) and whether such adjustment can be changed from year to year?

(e) Whether the applicant can change the method of setting off the current year’s profit against loss brought forward or unabsorbed depreciation from year to year and whether that amounts to a change in the method of accounting and requires the approval of the Assessing Authority?

(f) Which of the methods viz. the method adopted by the applicant for calculating the book profit for the Assessment Years 2004-05 & 2005-06 or the method adopted by the Revenue for the aforesaid Assessment Years is the correct method?

RULING OF AUTHORITY:

(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 the 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 & 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 can not avail of the benefit of reduction envisaged under Sub-section (2) of Section 115JB in a manner different from the one prescribed under the ‘act’ , so as to be more beneficial to the applicant.

(d) No. It is not open to the applicant to reduce the current year’s profit by the loss brought forward or unabsorbed depreciation in a manner more beneficial to the applicant and such adjustment cannot be charged from year to year.

(e) No. The applicant cannot change the method of reducing the current year’s profit by the loss brought forward or unabsorbed depreciation from year to year . This would amount to change in the method of accounting (for the purpose of section 115JB) , which is not permissible.

(f) The method adopted by the applicant for calculating book profit for the assessment years 2004-05 and 2005-06 is not in accordance with section 115JB and is , therefore , incorrect. The method adopted by the revenue for the aforesaid assessment years is the correct method.

( Click here for full text of unreported ruling AIT-2006-80-AAR )