Ita/120/2007 Of M/S Steel And Industrial Forgings Ltd v. The Asst. Commissioner Of Income Tax

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE P.N.RAVINDRAN TUESDAY, THE 6TH JANUARY 2009 / 16TH POUSHA 1930 ITA.No. 120 of 2007() --------------------- ITA.1280/2005 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT ----------------------------- M/S. STEEL AND INDUSTRIAL FORGINGS LTD., ATHANI, MULANGUNNATHUKAVU, TRICHUR, REPRESENTED BY ITS MANAGING DIRECTOR, SRI. K.SHAMSUDDIN. BY ADV. SRI.K.VINOD CHANDRAN RESPONDENT: -------------------- THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE I (1), TRICHUR. ADV. SRI.P.K.R.MENON,SR.COUNSEL,GOI(TAXES) SRI.GEORGE K. GEORGE, SC FOR IT THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 06/01/2009 ALONG WITH ITA No.117/2007, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.R. C.N.RAMACHANDRAN NAIR & P.N.RAVINDRAN, JJ. ======================================I.T.A.Nos.117 & 120 of 2007 ======================================Dated this the 6[th] day of January 2009 JUDGMENT Ramachandran Nair, J. The two appeals filed by the assessee which is a Government ofKerala undertaking pertain to assessment for the years 1998-1999 and1999-2000. The total income computed under the provisions of theIncome Tax Act for both assessment years was less than 30% of thebook profit and therefore the assessment for these years isunderSection 115-JA of the Income Tax Act. In the course of computation ofbook profit for assessment under Section 115-JA, the assessee claimeddeduction of unabsorbed depreciation of Rs.42,53,591/- which was lowerthan the brought forward business loss. In support of their claim, theassessee filed calculation statement, produced as Annexure-B. It isseen that against the income determined for 1995-1996, the assesseeclaimed set off of carry forward business loss and depreciation togetherfrom the assessment years 1985-1986 onwards. After absorbing carryforward business loss and depreciation against the income for theassessment year 1995-1996, the assessee was still left with unabsorbedbusiness loss and depreciation for the assessment year 1996-1997.After setting off the unabsorbed business loss and depreciationagainst ITA No.120 of 2007 2 the income for 1996-1997, the assessee has worked out the carryforward business loss available for 1997-1998 as Rs.2,51,00,559/-. Thededuction claimed in the computation of book profit for the assessmentyear 1998-1999 is lower between these two figures in terms ofexplanation-iii to Section 115-JA of the Act. However, the AssessingOfficer noticed that the statement of the claim prepared by the assesseewas in deviation from the provisions of the Income Tax Act in as much asthe carry forward business loss was first set off against the profit. Theassessee combined the business loss with the depreciation and set offboth together and brought forward a combined figure of loss and againdesected it for the purpose of claiming relief for the last assessmentyear i.e.1997-1998. Consequently the Assessing Officer declineddeduction of unabsorbed depreciation claimed for both the years. Theappeals in two stages were unsuccessful and the assessee has filedthese appeals under Section 260A of the Income Tax Act. 2.We have heard the learned Senior Counsel Sri.Saranganappearing for the assessee and the learned Senior Standing CounselSri.P.K.R.Menon appearing for the respondents. 3. Even though the assessee has raised several questions of law forthe decision of this Court, the only issue to be considered is whether thededuction claimed in the computation of book profit should be the loweramount of the brought forward business loss in terms of the provisions ITA No.120 of 2007 3 2.We have heard the learned Senior Counsel Sri.Saranganappearing for the assessee and the learned Senior Standing CounselSri.P.K.R.Menon appearing for the respondents. 3. Even though the assessee has raised several questions of law forthe decision of this Court, the only issue to be considered is whether thededuction claimed in the computation of book profit should be the loweramount of the brought forward business loss in terms of the provisions ITA No.120 of 2007 3 of the Income Tax Act or whether it is in the way claimed by theassessee under Annexure-B. The learned senior counsel appearing forthe assessee has relied on the decision of the Supreme Court inAppollo Tyres v CIT reported in 255 ITR 273 and contended that theassessing officer cannot deviate from the figures available in the booksof account of the assessee. The learned senior counsel appearing forthe Revenue has relied on the decision of the Supreme Court inRashtriya Ispat Nigam Ltd., Inre (285 ITR page 1 (AAR) and contendedthat the officer was right in declining the relief because after setting offthe unabsorbed carry forward business loss against the income forpreceding year, the assessee was left with no business loss and somuch so clause (b) of Explanation to Sub Section (iii) of Section 115 JA(1) has no application. In order to appreciate the contention, we have torefer to the law and provisions contained in Section 115 (JA). Therelevant portion of Section 115JA (1) is extracted hereunder. (1) Notwithstanding anything contained in any other......................................... Explanation- For the purposes of this section “book profit”means the net profit as shown in the profit and loss accountfor the relevant previous year prepared under sub section (2)as increased by- ITA No.120 of 2007 4 a) the amount of income tax paid or payable, and theprovision therefore; or b) the amounts carried to any reserves by whatevername called; or c) the amount or amounts set aside to provisionsmade for meeting liabilities, other than ascertainedliabilities; or d) the amount by way of provision for losses ofsubsidiary companies; or e) the amount or amounts of dividends paid orproposed; or f)the amount or amounts of expenditure relatable toany income to which any of the provisions of ChapterIII applies: If any amount referred to in clauses (a) to (f) isdebited to the profit and loss account, and as reducedby,-- i)the amount withdrawn from any reserves orprovisions if any such amount is credited to the profitand loss account; ....................................................................................................................................... iii) the amount of loss brought forward or unabsorbeddepreciation, 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 theamount of loss brought forward or unabsorbeddepreciation is nil; or] ................................................................ ............................................................ i)the amount withdrawn from any reserves orprovisions if any such amount is credited to the profitand loss account; ....................................................................................................................................... iii) the amount of loss brought forward or unabsorbeddepreciation, 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 theamount of loss brought forward or unabsorbeddepreciation is nil; or] ................................................................ ............................................................ 4. From the above, it is clear that the procedure to be followed by theAssessing Officer is computation of total income under the provisions ofthe Income Tax Act and then comparethe same with 30% of the BookProfit based on the books of account prepared by the assessee in termsof Schedule-6 of the Companies Act and if it is found that the totalincome computed by the officer is less than 30% of the book profit, thenthe assessing officer has to initiate proceedings for assessment underSection 115-JA of the Act. The explanation to Section 115-JA (1)provides for certain adjustments by way of additions and deductions tothe book profit. The additions under clause-f of Explanation to Section115JA (1) is applicableonly if any of the amounts referred to therein isdebited to the profit and loss account. After adjusting the book profit withthe additions, if any made, deductions are provided under Sub Clause (i)to (ix) to the explanation. The controversy pertains to the deduction frombook profit and unabsorbed business loss claimed under sub clause-iii.The assessee's case is that they are entitled to combine unabsorbeddepreciation and business loss and set off the same against the profit forearlier years and then carry over the figure to the succeeding years forfurther setting off in the same manner and then to claim benefit underclause -iii by bifurcating the last figure between brought forward businessloss and unabsorbed depreciation. Department's case on the other hand ITA No.120 of 2007 6 is that in terms of Section 72(2) of the Act, carry forward business loss isfirst set off against the profit and only if there is profit left out, there isscope for adjustment of depreciation against the same and as long asdepreciation is not set out for any year after setting off completebusiness loss, the depreciation will be carried to the next year. In otherwords, the carry forward depreciation and unabsorbed business lossshould be separately taken from income tax assessments completed forthe earlier years. We are inclined to uphold the order of the Income TaxAppellate Tribunal for more than one reason. In the first place under theexplanation contained in sub clause iii of Section 115JA which issubstituted by the Finance Act, 2002 with retrospective effect from1.4.1997, the loss shall not include depreciation. It is further stated inclause-(b) of the explanation to sub section (iii) that the relief under thesub section shall not be available, if there is no unabsorbed depreciationor brought forward loss. In other words, in order to get the benefit ofSection 115JA, the assessee must have brought forward business lossand unabsorbed depreciation and the amount for deduction is the lowestof these two amounts. As pointed out by the assessee's counsel, theamount of loss brought forward or unabsorbed depreciation has to betaken as per books or books of account of the assessee which asdefined under Section 2(12A) includes ledgers, day books, cash books,account books and other books whether kept in the written form or as ITA No.120 of 2007 7 ITA No.120 of 2007 7 print-outs of data stored in a floppy, disc, tape or any other form ofelectro-magnetic data storage device. The question to be considered iswhether the books of account referred to in sub clause -iii are the onlyone referred to in the definition or whether it is to be taken from thestatement of claim made before the assessing authority for the purposeof previous assessments. It is conceded that the assessee has workedout the figures placed in the previous years' income tax assessments.More over, brought forward business loss and unabsorbed depreciationcan only refer to the carry forward business loss and depreciation forsetting off against the income for the subsequent years in terms ofSection 72 of the Income Tax Act. It is to be noted that Section 72(3)disentitles the assessee from carrying business loss beyond eightassessment years. However, the assessee is entitled to carry forwardunabsorbed depreciation for setting off the income for an indefiniteperiod. Section 72(2) provides that first set off shall be carry forwardbusiness loss against the profit for an year and set off of depreciationagainst profit arises only if any profit is left after setting off first the carryforward business loss. In this case, it is the conceded position that if theassessee had set off the brought forward business loss first againstprofit, the assessee would not have been left with carry forward businessloss for setting off against the income for the assessment year 1998-1999.In other words, the assessee would have only unabsorbed ITA No.120 of 2007 8 depreciation carried forward to the year 1999-2000, if set off was madein terms of the provisions contained in Section 72 of the Act. On theother hand, the assessee made their own claim of carry forward and setoff of business loss and depreciation by combining both together whichis contrary to the other provisions of the Act and the same is turneddown by the Assessing Officer. We, therefore, uphold the finding of theAppellate Tribunaland hold that the brought forward business loss andunabsorbed depreciation referred to in sub clause- iii are carry forwardbusiness loss and unabsorbed depreciation as visualised under Section72 of the Income Tax Act and there is no scope for an assessee makingrevised computation contrary to the income tax assessments for thepreceding years. The question raised is therefore answered in favour ofthe department and consequently we dismiss the assessee's appeals. C.N.RAMACHANDRAN NAIR, JUDGE P.N.RAVINDRAN, JUDGE