2018 (7) TMI 1724 - AT - Income Tax

Tribunal affirms Income Tax Act book profit calculation method, emphasizes statutory deductions

M/s Milan Intermediates LLP Versus The Income Tax Officer, Ward-2 (1) (4), Ahmedabad

M/s Milan Intermediates LLP Versus The Income Tax Officer, Ward-2 (1) (4), Ahmedabad - TMI Issues Involved:1. Methodology of calculating book profit under Section 115JB of the Income Tax Act.2. Correctness of the set-off of brought forward business loss and unabsorbed depreciation.3. Interpretation of Explanation (1)(iii) to Section 115JB of the Income Tax Act.4. Factual discrepancies in the quantification of carry forward losses.Detailed Analysis:1. Methodology of Calculating Book Profit under Section 115JB:The appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals), which upheld the Assessing Officer's (AO) method of calculating book profit under Section 115JB. The AO observed that the assessee incorrectly calculated the eligible amount of set-off for brought forward losses and unabsorbed depreciation, leading to a higher book profit assessment. The AO determined the book profit at Rs. 44,94,813/- instead of Rs. 9,06,945/- as shown by the assessee.2. Correctness of the Set-off of Brought Forward Business Loss and Unabsorbed Depreciation:The assessee challenged the AO's computation, arguing that the Income Tax Act does not prescribe a specific methodology for setting off brought forward losses and unabsorbed depreciation. The assessee used the FIFO method, first adjusting brought forward losses and then unabsorbed depreciation against book profits consistently on a year-to-year basis. The AO, however, recomputed the book profit, leading to a higher figure, which was upheld by the CIT(A).3. Interpretation of Explanation (1)(iii) to Section 115JB:The core issue was the interpretation of Explanation (1)(iii) to Section 115JB, which allows a deduction of the lower of brought forward losses or unabsorbed depreciation as per books of account. The assessee contended that they should be allowed to reduce the net profits by either brought forward losses or unabsorbed depreciation, whichever they chose, provided it was the lower amount. The Tribunal, however, disagreed, stating that the reduction should be from the same category (either loss or depreciation) and not interchangeably. The Tribunal emphasized that the methodology adopted by the assessee was not in line with the statutory provisions, which require the lower of the two (unabsorbed loss or unabsorbed depreciation) to be deducted from the book profits.4. Factual Discrepancies in the Quantification of Carry Forward Losses:The assessee pointed out factual errors in the AO's computation, such as the discrepancy in the carry forward loss figures. The Tribunal did not delve into the arithmetical accuracy but remanded the issue back to the AO for re-determination of the quantum of unabsorbed loss and depreciation available for set-off, following the principles laid out in the judgment.Conclusion:The Tribunal upheld the AO's methodology and interpretation of Explanation (1)(iii) to Section 115JB, dismissing the assessee's appeal. The issue of factual discrepancies in the quantification of carry forward losses was remanded back to the AO for re-determination. The Tribunal emphasized that the reduction from book profits must adhere strictly to the statutory provisions, ensuring the lower of unabsorbed loss or depreciation is deducted, and not interchangeably as per the assessee's preference.