For the purposes of section 115JB of the Act, the term gloss brought forward’ can only mean losses on the last day of the immediately preceding year and no other meaning can be given to it.
In the case of CIT Vs. Sumi Motherson Innovative Engineering Ltd. [2010-TIOL-756-HC-DEL-IT]’, the Delhi High Court (“NC”) held that the term ‘loss brought forward’ in clause (iii) provided in Explanation (1) to sub-section 2 of section 115JB of the Income-tax Act, 1961 (“the Act”) can only mean the loss on the last day of the immediately preceding year and events during the year would have no impact on the brought forward losses for the purposes of the above provisions of section 115JB of the Act.
• The assessee was engaged in the business of manufacture and sale of injection moulded plastic parts, stamping parts/moulds and job work. For the relevant Assessment Year (“AY”), the assessee filed its return of income declaring ‘Nil’ taxable income. Furthermore, the assessee earned a net profit of INR 79.75 million which was further reduced by the accumulated losses of INR 346.70 million which were brought forward from the earlier years.
• During the year, the assessee company passed a capital reduction scheme under section 100 of the Companies Act, 1956 by virtue of which brought forward losses of the immediate preceding years were reduced to Nil. The scheme of capital reduction was approved by the shareholders in the Annual General Meeting and thereafter by the HC.
• As a result of capital reduction, the accumulated losses were completely wiped off and there were no accumulated losses in the books of account for the relevant AY.
Issue :- Whether for the purposes of section 115JB of the Act, ‘loss brought forward’ as on the first day of the financial year has to be considered or the loss, if any, as on the last day of the financial year has to be considered for the purposes of computing book profits.
• The company was entitled to deduct from the book profits the amount of losses brought forward or unabsorbed depreciation, whichever is less as per the books of account. The brought forward loss is the amount determined in the books on the last day of the immediately preceding year which has to be deducted from the book profits.
• Even if during the financial year, the losses were wiped off because of reduction in share capital, this was of no relevance as the accumulated losses on the last day of the financial year were to be taken into consideration.
• The profit and loss account is not prepared by including brought forward losses, but such losses are carried to the balance sheet. Therefore, both conceptually and statutorily, a look at the statutory provisions would show that from the book profit as computed, the brought forward losses were to be set off. There was no further requirement that if such brought forward loss has been liquidated, income for a company liable to Minimum Alternate Tax would not be eligible to such a deduction as was represented by brought forward losses.
• Brought forward losses do not get adjusted on the very first day of the next financial year. Only the quantum of loss available for set off is known on the first day. This amount of brought forward loss is then carried to the last day of the accounting period, when the profits, if any, available for off-set against the said losses become known.
• It is the book profit which is determined on the last day of the accounting period which has to be looked into for the purposes of section 115JB of the Act. The book profit can be known only when the books are written, i.e. on the last day of the financial year. Although the brought forward losses may be quantified on the first day of the year it is only at the end of the accounting period that such losses can be adjusted. The set-off can be effected only after ascertainment of the profit. If, in between the first day and the last day of the accounting period, the loss gets liquidated, nothing would be left over for set-off against the profit.
High Court’s ruling
• The HC, while dismissing the revenue’s appeal, held that the decision must rest on the provision of Explanation (iii) of section 115JB of the Act which uses the term ‘loss brought forward’.
• For interpretation of the term ‘loss brought forward’, the rule of literal interpretation is to be adopted and if the language is plain and unambiguous, effect is to be given without going behind the intent of the legislature.
• As per the cardinal principle of interpretation, the fiscal statute should be construed strictly as held by the Supreme Court in the case of CIT v. Kasturi and Sons Ltd.  237 ITR 24 (SC) and so long as the provision is free of ambiguity; there is no need to draw any analogy as held by the Rajasthan High Court in the case of Rajasthan State Electricity Board v. DCIT  200 ITR 434 (Raj.).
• Thus, the meaning that is to be assigned to this term would be naturally, the loss as on the last date of the immediately preceding year, which was brought forward to the financial year in question.
Conclusion :- This judgement may be of immense help in merger and acquisition transactions. While interpreting the provision of section 115JB of the Act, the HC applied the rule of literal interpretation holding that if the provisions of the fiscal statute is clear and unambiguous, the same needs to be read in its literal sense.