Amline Textiles (P.) Ltd. v. Income-tax Officer, Ward 3(1)-1, Mumbai

ORDER

R.S. Syal, Accountant Member. - This appeal presented by the assessee emanates from the order passed by the Commissioner of Income-tax (Appeals) on 11-8-2006 in relation to the assessment year 2003-04.

2. The only issue raised in this appeal is against the action of the ld. CIT(A) in restricting the deduction under clause (iii) of Explanation (1) to section 115JB to Rs. 1,06,61,828 as against claimed by the appellant to the tune of Rs. 1,51,15,393.

3. Briefly stated the facts apropos the case are that the assessee had shown total income of Rs. 1,97,31,850 which was adjusted against the brought forward loss. Book profit under section 115JB of the Income-tax Act, 1961 was worked out by the assessee as under :—

4. On being called upon to justify its claim, the assessee furnished detail of the set off of unabsorbed depreciation amounting to Rs. 1.51 crores, which was reduced by it for computing the book profit for the current year. It was explained that as per the provisions of section 115JB(2), the amount of loss brought forward or unabsorbed depreciation, whichever is less as per the books of account, was set off against the profit as per P&L account and also furnished the detail of unabsorbed depreciation and brought forward loss as per books of account, as under :—

5. The Assessing Officer noted that for the assessment year 2001-02 there was book loss of Rs. 37,23,163 after the claim of depreciation amounting to Rs. 44,53,565. After eliminating the effect of the depreciation for the year, the Assessing Officer noted that there was a book profit of Rs. 7,30,402. He, therefore, took the amount of loss excluding depreciation at zero for this year and did not allow any set off on this count in the computation of book profit in terms of the provisions of clause (iii) of Explanation (1) to section 115JB(2). He however allowed deduction of Rs. 1.06 crores in respect of unabsorbed depreciation for the remaining three assessment years, that is 1999-2000, 2000-01 and 2002-03. Thus the amount of deduction claimed by the assessee at Rs. 44,53,565 towards unabsorbed depreciation for the year ending on 31-3-2001 was refused for the purpose of computing the book profit under section 115JB. No relief was allowed in the first appeal.

6. Before us the learned Counsel for the assessee contended that the calculation made by the assessee was in accordance with the provisions of clause (iii) to the Explanation (1) below section 115JB(2), as per which the total amount of loss brought forward or the unabsorbed depreciation, whichever is less as per the books of account, was liable to be reduced from the net profit as shown in the Profit & Loss account for the purposes of determining "book profit" under section 115JB. His contention is that the consolidated figure of unabsorbed depreciation or brought forward loss, whichever is less, which in the instant case is Rs. 1.51 crores, was to be considered and this exercise could not have been done on year to year basis. As was done by the authorities below. In other words the contention is that if in one year there is unabsorbed depreciation but profit before depreciation, then the total figure of unabsorbed depreciation along with the unabsorbed loss in relation to all the preceding years should be considered and this exercise should not be done on year to year basis. In the opposition the learned D.R. strongly relied on the impugned order. His submissions were the reiteration of the reasoning recorded by the lower authorities for not accepting the assessee's claim.

7. We have heard the rival submissions and perused the relevant material on record. Both the sides admitted that it is a virgin issue and no precedent is so far available on this point. The short controversy raised for our consideration is : Whether clause (iii) of Explanation (1) to section 115JB(2) refers to the year-wise consideration of the amounts of brought forward loss or unabsorbed depreciation for the purposes of reduction from the net profit as per profit and loss account or it is the aggregate amount of loss brought forward or unabsorbed depreciation as one composite figure? Whereas the assessee's claim is that it is the aggregate amount of loss brought forward or unabsorbed depreciation relating to the earlier years which should be considered for the purpose of deducting from the net profit as per profit & loss account, the revenue is contending that the brought forward losses as well as unabsorbed depreciation in respect of each year is to be separately examined and allowed. The Assessing Officer has not allowed deduction for unabsorbed depreciation amounting to Rs. 44.53 lakhs while computing book profit precisely on the ground that in the assessment year 2001-02 the figure of profit before depreciation is a positive figure at Rs. 7.30 lakhs and as per sub-clause (b) of Explanation to clause (iii) of Explanation (1), the loss excluding depreciation has to be taken at zero.

8. Section 115JB is a special provision for payment of tax by certain companies. Sub-section (1) contains the non obstante clause and provides that where the income-tax payable on the total income of a company as computed under this Act is less than 10 per cent of its book profit, then 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 the amount of income-tax at the rate of 10 per cent. Explanation (1) provides the mode of computing "book profit" by taking net profit as shown in the profit and loss accounts as its starting point to be increased by the items mentioned in clauses (a) to (h) debited to the profit & loss account and as reduced by the items specified in clauses (i) to (vii). At this stage it will be apt to consider the relevant part of this section as under :—

"Explanation (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 -

(h) if any amount referred to in clauses (a) to (h) 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 this clause,—

(a) the loss shall not include depreciation;
(b) the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation is nil; or"

9. On going through the mandate of the above provision it transpires that having increased the amount of net profit as per profit and loss account in accordance with clauses (a) to (h), certain items are to be reduced which, inter alia include the amount of loss brought forward or the unabsorbed depreciation, whichever is less as per the books of account. The term 'loss' has been defined for the purposes of this clause as exclusive of the amount of depreciation.

10. Here it would be relevant to mention that section 115J, the original predecessor of section 115JB also has Explanation which provides the mechanism for computing the 'book profit'. Clause (iv) provides for the reduction of 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 section 205 of the Companies Act, 1956 are applicable. There was controversy on the interpretation of term 'loss' in clause (iv) of the Explanation as to whether the loss should be considered as before or after taking into account the amount of depreciation. The Hon'ble Supreme Court in the case of Surana Steels (P.) Ltd. v. Dy. CIT [1999] 237 ITR 7771 held that the term 'loss' occurring in clause (b) of first proviso to section 205(1) of Companies Act has to be read as amount arrived at after taking into account the depreciation and accordingly the same was to be read and understood in the context of section 115J also. Resultantly the term "loss" was understood as the amount arrived at after taking into account the depreciation. The Legislature made its intention clear by providing in the successor sections that the loss shall not include depreciation, it is so provided in section 115JA and the similar wording has been used in clause (iii) of Explanation (1) to section 115JB also, which is under consideration. Hence the judgment of the Hon'ble Supreme Court rendered in the case of Surana Steels (supra) is not relevant in the context of section 115JB, which specifically states that the loss shall not include depreciation. The net effect of the position as it now exists is that while computing the amount of loss brought forward, the amount of depreciation is not to be considered. In other words, the loss for the purposes of section 115JB has to be computed before depreciation.

11. The basic rule of interpretation of the provisions is the 'strict rule', that is, follow what has been expressly stated in the provision and go by the plain language of the section. It is not permissible to import any thing into statutory provision and read what is not explicitly provided. The need for unearthing the real intention arises only when the language of the section is ambiguous, vague or uncertain. With this basic principle of interpretation on hand, we move on to examine the rival contentions made by the parties as to whether clause (iii) it refers to consideration of year-wise separate figures of unabsorbed depreciation and loss brought forward or the composite figures.

12. Clause (iii) states that 'the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account' is to be reduced from the net profit. As per the plain language of this provision, it is noted that the word employed in the provision is the "amount" and not the "amounts" of loss brought forward or unabsorbed depreciation, whichever is less. The reference to the "amount of" brought forward loss or unabsorbed depreciation whichever is less shows the intention of the Legislature for considering one consolidated figure of brought forward loss or unabsorbed depreciation for the earlier years in totality and not on year to year basis. The use of the word "amount" in singular conveys the aim of referring it to one figure. Wherever the Legislature desired to use the word "amount" in plural, it specifically used the word "amounts" instead of the "amount" as can be seen from the heading of section 40 - 'Amounts not deductible'. From here we can easily deduce that for the purposes of clause (iii) of Explanation (1) the unabsorbed depreciation for all the earlier years is to be clubbed into one amount; and the amount of brought forward loss (before depreciation) is also to be taken by summing up all the figures of loss of earlier years, and then the lower of these two amounts is to be reduced from the net profit as shown in the profit & loss account so as to comply with the prescription of clause (iii) of Explanation (1). Similar position is coming up from the pressing into service of the word 'loss' in this clause in contradistinction to the word 'losses', as has been done in the marginal notes to sections 72, 73, 74, 74A and 75 etc. From here we gather that by using the words 'amount' and 'loss' in this clause, the point has been made clear that it is a composite figure each of the unabsorbed depreciation and brought forward loss, that merits consideration.

13. Moving still further we find from the language of this clause that there is no reference to considering the brought forward loss or unabsorbed depreciation on year to year basis. There is nothing in the language of section, which could suggest, even remotely, that the Legislature intended to consider year-wise figures. If it had desired like that, then it would have been so stated in unequivocal terms in the provision itself. In the absence of any specific mention in this regard in the clause, we are unable to infer such intendment. Since the language of the section is clear and does not admit of any doubt, we are not persuaded to interpret it in the way, the ld. DR impresses upon us to do.

14. The authorities below have concluded that year-wise determination of the amount of loss brought forward or unabsorbed depreciation is to be considered and if in a particular year - as in assessment year 2001-02 under consideration - there is no loss before depreciation, then the benefit of unabsorbed depreciation cannot be granted. In forming this opinion, assistance has been taken from the opening words of sub-section (1) of section 115JB as well as sub-section (5) of this section. Sub-section (1) starts with a non obstante clause : "Notwithstanding anything contained in any other provisions of this Act, ........" and sub-section (5) states that : "Save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section." It is on the strength of these two sub-sections that the learned CIT(A) has decided that all other provisions of the Act merit consideration in the determination of the book profit under section 115JB and hence the provisions of sections 71 to 73 will also apply and when so applied section 72 serves as guiding light as per which the benefit of carry forward of business loss is limited to eight years. The case is made out that since the business loss can be carried forward only for eight years, and in the ninth year, the unabsorbed loss of the first year will cease to be available for set off, albeit for second to seventh years, it can still be carried forward, it automatically implies that the amount of loss has to be carried forward on year to year basis for the purposes of section 115JB also and hence it cannot be a single figure of loss for all the years. As all the provisions of the Act including section 72 apply by virtue of sub-sections (1) and (5) of section 115JB, it has been opined that the unabsorbed depreciation and unabsorbed business loss are to be maintained year-wise.

15. We are not convinced with this line of thinking for the reason that what is contemplated by sub-sections (1) and (5) is that the other provisions of the Act should be considered as in operation while giving effect to section 115JB. Reference to "other provisions of this Act" clearly indicates that what is provided in section 115JB should be religiously followed accordingly and anything over and above that will be subject to the other provisions of the Act. By no stretch of imagination can it be construed as substituting the other provisions of the Act in place of what is specifically made available in this section, insofar as the computation of book profit is concerned, the entire mechanism for its calculation is clearly set out in Explanation (1). Not only starting point being the net profit as shown in the profit & loss account but also all the amounts which are to be increased as stipulated in clauses (a) to (h) and those which are to be reduced as specified in clauses (i) to (vii) find separate mention in the scheme of the section itself. So the computation of 'book profit' is to be done strictly as per this Explanation and no assistance from any other section of the Act can be taken for that purpose. When clause (iii) of Explanation (1) clearly states that 'the amount of loss brought forward or unabsorbed depreciation, which is less as per books of account' is liable to be reduced, in our considered opinion, there is no authority for falling upon the command of section 72 for holding that the business loss is to be considered on year to year basis and not as an aggregate figure for all years in unison.

16. There is one more reason for not approving the view taken by the authorities below. Section 72(3) restricts the period to which the loss can be carried forward to not more than eight assessment years immediately succeeding the assessment year for which the loss was first computed. As per this section if there is a brought forward loss which is more than eight years old, that has to be abandoned and only the brought forward loss of less than the prescribed period can be carried forward for set off against the business income. On the contrary there is no prohibition in section 115JB as per which the amount of unabsorbed loss is to be discarded after the expiry of eight years from the year in which it was first computed. Even if loss is brought forward from 50 years back, that has also to be reckoned. To put it simply the amount of loss brought forward or unabsorbed depreciation has to be considered for as many years as coming in the books of account irrespective of any rider for a particular number of years. We, therefore, hold that reference to the provisions of sections 71 to 73 for arriving at the conclusion that section 115JB refers to year-wise consideration of the loss brought forward or unabsorbed depreciation, is erroneous.

17. Now we turn to examine clause (b) of Explanation to clause (iii) of Explanation (1) to section 115JB(2), which provides that 'the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation is nil'. The ld. CIT(A) has relied on this provision for upholding the action of the Assessing Officer that since the loss before depreciation for assessment year 2001-02 is Nil, hence no deduction is permissible for this year. A bare perusal of this provision brings out the intention of the Legislature in not allowing the reduction of the subject-matter of clause (iii) for the purposes of computing 'Book profit', if the amount of unabsorbed depreciation of brought forward loss is Nil. In other words it has been provided that the reduction is not to be permitted if one of these two figures namely, loss brought forward or unabsorbed depreciation, is nil. To put it simply if one of these two figures is Nil, then the other figure will be ignored altogether. The rationale behind this portion of enactment is not to unnecessarily allow the reduction of one, if the other is not there. Since the loss is to be considered before depreciation and if there is brought forward loss only, but no corresponding unabsorbed depreciation or vice versa, then no reduction is to be made of the amount of brought forward loss or unabsorbed depreciation, as the case may be. In the earlier part of the order we have held that if there is loss brought forward and unabsorbed depreciation for more than one year, then one combined figure each of unabsorbed depreciation and brought forward loss for such years is to be determined for consideration. Adverting to the facts of our case, we find that none of the figures of unabsorbed depreciation or brought forward loss is Nil, hence this part of the Explanation is not relevant for our purpose.

18. In view of the foregoing discussion we are of the considered opinion that the lower of the solitary figures of the unabsorbed depreciation or loss brought forward for all the earlier years taken together, is to be reduced for the purposes of computing "book profit" under section 115JB. As the aggregate amount of unabsorbed depreciation in respect of the four years is at Rs. 1,51,15,393 which is lower than the aggregate of the loss before depreciation at Rs. 2,40,75,717, in our considered opinion, the assessee had rightly claimed reduction for the lower amount of Rs. 1.51 crores. We, therefore, accept the assessee's contention on this point.

19. In the result, the appeal is allowed.