2002 (7) TMI 229 - AT - Income Tax

Tribunal rules on unabsorbed losses calculation under Income Tax Act

The Tribunal held that unabsorbed depreciation and business loss should be determined as per the regular provisions of the Income Tax Act, regardless of ... - Issues Involved:1. Interpretation of Section 115J(2) of the Income Tax Act.2. Allowance of carry forward of losses/depreciation.3. Applicability of Tribunal's order in the case of Motor General Finance.4. Consideration of CBDT Circular No. 495.5. Judicial precedents and their applicability.Detailed Analysis:1. Interpretation of Section 115J(2) of the Income Tax Act:The primary issue revolves around the interpretation of Section 115J(2) of the IT Act. The Revenue challenged the CIT(A)'s order, arguing that the CIT(A) erred in interpreting Section 115J(2) by allowing the carry forward of losses as claimed by the assessee. The AO disallowed the claim, stating that Section 115J stipulates that the total income of a company is deemed to be 30% of its book profit, which does not affect the computation of total income under the Act. The CIT(A), however, directed the AO to allow the carry forward of losses based on the Tribunal's order in the case of Motor General Finance.2. Allowance of Carry Forward of Losses/Depreciation:The assessee claimed carry forward of losses for the assessment years 1988-89, 1989-90, and 1990-91, which were determined as income under Section 115J. The AO rejected this claim, arguing that Section 115J(1) does not affect the determination of amounts to be carried forward, as specified in Section 115J(2). The CIT(A), however, allowed the claim based on the Tribunal's previous order, interpreting that losses should be treated as set off only up to the figure resulting in total income being equal to the deemed income charged under Section 115J(1).3. Applicability of Tribunal's Order in the Case of Motor General Finance:The CIT(A) relied on the Tribunal's order in the case of Motor General Finance, where it was held that investment allowance should be set off against 30% of the book profit, and the remaining amount should be carried forward. The Revenue argued that this order did not consider CBDT Circular No. 495 and was, therefore, not applicable. The Tribunal noted that the Circular was not cited in the Motor General Finance case and that the Ahmedabad Bench had taken a contrary view after considering the Circular.4. Consideration of CBDT Circular No. 495:The Revenue emphasized that the Tribunal in the Motor General Finance case did not consider CBDT Circular No. 495, which clarifies the scope of Section 115J regarding the carry forward of unabsorbed losses and depreciation. The Circular explains that Section 115J involves two processes: determining income under the IT Act and computing book profit. The Circular explicitly states that the deeming provisions of Section 115J(1) do not affect the determination of amounts to be carried forward under Section 115J(2).5. Judicial Precedents and Their Applicability:The Revenue cited several judicial precedents, including the Andhra Pradesh High Court's judgment in Suryalatha Spinning Mills and the Ahmedabad Bench's order in Gujarat Petrosynthese Ltd., which supported the AO's view. These judgments emphasized that Section 115J(2) maintains the determination of unabsorbed depreciation and losses under the regular provisions of the Act, unaffected by the deeming provisions of Section 115J(1). The Tribunal also referred to the Karnataka High Court's judgment in Kwality Biscuit Ltd. and the Calcutta High Court's judgment in Singh Alloys & Steel Ltd., which supported this interpretation.Conclusion:The Tribunal concluded that unabsorbed depreciation and business loss should be determined as per the regular provisions of the IT Act, irrespective of the income computed under Section 115J(1). The CIT(A)'s order was set aside, and the matter was restored to the AO to recompute the claim of unabsorbed losses accordingly. The appeal of the Revenue was allowed for statistical purposes.