MAT book profit computation cannot treat rehabilitation capital credits as income or erase carried-forward loss or depreciation.

For MAT computation under section 115JB, book profit must be derived from the profit and loss account prepared in accordance with Schedule VI, and capital restructuring credits under a rehabilitation scheme do not become income or operating profit merely because the debit balance is adjusted against them. Such accounting entries do not extinguish accumulated loss or unabsorbed depreciation for clause (iii) of the Explanation to section 115JB(2). The assessee was therefore entitled to reduce the lower of brought forward loss or unabsorbed depreciation from book profit, and the disallowance was unsustainable.

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Issues: Whether, for the purpose of computation of book profit under section 115JB, the assessee was entitled to reduce brought forward loss or unabsorbed depreciation notwithstanding the accounting entries passed pursuant to the BIFR rehabilitation scheme.

Analysis: The computation of book profit under section 115JB has to be made on the basis of profit and loss account prepared in accordance with Part II and Part III of Schedule VI to the Companies Act, 1956. The restructuring credits arising from rehabilitation measures were capital in nature and did not constitute income or profit from the working of the company. Mere adjustment of debit balance in the profit and loss account against such capital credits did not legally extinguish the assessee's accumulated loss or unabsorbed depreciation for the purpose of clause (iii) of the Explanation to section 115JB(2). The Tribunal also noted the past acceptance of the assessee's computation and found no justification for a different view on the same facts.

Conclusion: The assessee was entitled to reduce the lower of brought forward loss or unabsorbed depreciation from book profit under section 115JB(2), and the disallowance was unsustainable.

Ratio Decidendi: For MAT computation, capital restructuring entries made pursuant to a rehabilitation scheme do not convert capital receipts into income or wipe out accumulated loss or unabsorbed depreciation available under the books for reduction under section 115JB(2).

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