Tribunal Upholds CIT(A) Decision on Notional Loss Exclusion

The Tribunal upheld the CIT(A)'s decision, dismissing the assessee's appeal. It was confirmed that the notional loss from the capital reduction of equity shares of the wholly-owned subsidiary should not be considered in computing book profits under section 115JB. The appeal was dismissed on 24th May 2022.

---

---

Issues Involved:
1. Disallowance of investments written off of Rs. 16,82,92,557 in computing book profits under provisions of section 115JB of the Act.

Issue-wise Detailed Analysis:

1. Disallowance of investments written off of Rs. 16,82,92,557:

Assessment Proceedings:
The assessee, a resident corporate entity engaged in financial services and investments, had an assessment framed for AY 2010-11 under section 143(3) on 20.03.2013. The Assessing Officer (AO) increased the book profits by Rs. 16,82,92,557, representing the write-off of investments in a subsidiary. This write-off was treated as a provision for loss, and since the tax payable under section 115JB was higher than the normal computation, the assessee was directed to pay tax accordingly. The assessment order did not discuss this issue in detail, but the book profits under section 115JB were computed in the income computation.

Appellate Proceedings:
The assessee explained that Forbes Finance Ltd. (FFL) merged with it effective 01.04.2008, and as a result, FFL's wholly-owned subsidiary, Forbes Technosys Ltd. (FTL), became a direct subsidiary of the assessee. FTL's equity shareholders passed a resolution on 05.01.2010 to reduce the paid-up share capital by canceling shares against a debit balance of Rs. 1710.28 Lacs in the Profit & Loss Account. This reduction was approved by the Bombay High Court on 26.02.2010, resulting in the cancellation of 1,71,02,800 shares, leaving 38,97,200 shares with the assessee. Consequently, the assessee wrote off Rs. 16,82,91,552 in investments and debited it to the Profit & Loss Account. The AO treated this as a provision for losses of subsidiary companies under Explanation (1)(d) for Section 115JB.

The assessee contended that the write-off was actual and not a provision for losses, alternatively arguing it was an ascertained liability. They relied on the Supreme Court decision in Apollo Tyres Ltd. (255 ITR 273), asserting that the AO had no jurisdiction to alter the profit shown in the Profit & Loss Account except as provided in the Explanation to Sec.115JB.

CIT(A) Findings:
The CIT(A) upheld the AO's decision, relying on the Special Bench Mumbai Tribunal's decision in Bennett Coleman & Co. Ltd. V/s Addl. CIT (141 TTJ 777), which held that loss on reduction of equity capital is a notional loss. The CIT(A) noted that the shareholders' percentage of shareholding remained the same before and after the reduction of share capital, and no actual loss occurred. The decision in Shivalik Venture Private Ltd V/s DCIT (173 TTJ 238) was also referenced, where it was held that profit from transferring capital assets to a wholly-owned subsidiary is excluded from net profit. Applying this logic, the notional loss from capital reduction should not be factored into the computation of book profits under section 115JB.

Tribunal's Findings and Adjudication:
The Tribunal agreed with the CIT(A) that the write-off was a notional loss since the assessee's ownership in FTL remained unchanged at 100% before and after the share cancellation. The transaction was a mere book entry, and nothing moved from the company's coffers. The Tribunal referenced the Special Bench Mumbai Tribunal's decision in Bennett Coleman & Co. Ltd. V/s Addl. CIT, supporting the notion that loss on equity capital reduction is notional. The Tribunal also noted that the decision in M/s PVP Corporate Parks Private Ltd. V/s DCIT did not apply since it involved an actual sale of fixed assets, unlike the present case.

The Tribunal further referenced the Mumbai Tribunal's decision in Shivalik Venture Private Ltd V/s DCIT, which held that profits from transferring capital assets to a wholly-owned subsidiary are excluded from net profit. Applying this analogy, notional losses should not be deducted when computing book profits under section 115JB.

Conclusion:
The Tribunal upheld the CIT(A)'s findings, dismissing the assessee's grounds. The appeal was dismissed, confirming that the notional loss from the capital reduction of equity shares of the wholly-owned subsidiary should not be factored into the computation of book profits under section 115JB.

Order Pronounced:
The appeal was dismissed on 24th May 2022.

---