Section 115JB sick-company exclusion and depreciation on loan waiver clarified; written-off advances remanded for fresh examination.

Section 115JB permits exclusion of the profits of a sick industrial company up to the assessment year in which its net worth first becomes equal to or exceeds accumulated losses; the exclusion therefore continued for the year under review because the company's profit arose from its sick industrial undertaking. The claim that written-off advances were allowable as business or trading loss required fresh factual verification and was remanded for reconsideration. On depreciation, a waiver of loan unconnected with the acquisition cost of fixed assets did not justify reducing the asset cost, so depreciation was to be allowed on the written-down value. Interest under Sections 234B and 234C was consequential.

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Issues: (i) Whether the profit of a sick industrial company had to be excluded while computing book profit under Section 115JB for the year in which its net worth exceeded accumulated losses; (ii) whether the disputed advances written off were allowable as business loss or trading loss, and whether depreciation had to be recomputed on the written-down value.

Issue (i): Whether the profit of a sick industrial company had to be excluded while computing book profit under Section 115JB for the year in which its net worth exceeded accumulated losses.

Analysis: Explanation 1(vii) to Section 115JB permits reduction of the profits of a sick industrial company from the assessment year in which the company became sick and up to the assessment year during which its entire net worth becomes equal to or exceeds the accumulated losses. The year in which the net worth first exceeds the accumulated losses is the last year for which the exclusion operates. Since the company's entire profit came from its sick industrial undertaking, the amount was outside book profit for the year in question.

Conclusion: The exclusion applied for the year under consideration, and the assessee succeeded on this issue.

Issue (ii): Whether the disputed advances written off were allowable as business loss or trading loss, and whether depreciation had to be recomputed on the written-down value.

Analysis: The claim relating to the advances required a fresh factual examination because the material before the Tribunal was incomplete on whether the advances were for raw material, capital goods, or market development. The matter was therefore restored to the Assessing Officer for reconsideration in accordance with law. On depreciation, the Tribunal followed its earlier view in the assessee's own case that waiver of loan did not justify reduction of the cost of fixed assets where there was no direct nexus with the acquisition cost, and depreciation had to be allowed on the written-down value after giving effect to that view. The interest levy under Sections 234B and 234C was consequential.

Conclusion: The issue of write-off loss was remanded for fresh adjudication, depreciation relief was allowed to the assessee, and interest was left to be recomputed consequentially.

Final Conclusion: The assessee obtained substantial relief on the MAT computation and depreciation, while the disputed write-off claim was sent back for reconsideration and the revenue's appeal failed.

Ratio Decidendi: For Section 115JB, the profits of a sick industrial company are excluded up to the assessment year in which its net worth first becomes equal to or exceeds accumulated losses, and a waiver of loan unconnected with the cost of fixed assets does not warrant reduction of the asset cost for depreciation purposes.

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