Susi Sea Foods Pvt. Ltd. Vs. ACIT (ITA No. 280/Vizag/2010) Visakhapatnam Bench of the Tribunal dated 9 May 2011
Facts :- The taxpayer was a private limited company. For the assessment year 2000-01, since the total income was less than 30% of the book profit, provisions relating to Minimum Alternate Tax were applicable to the taxpayer under section 115JA of the Income-tax Act (“ITA”). While computing the book profit under section 115JA, the taxpayer had reduced unabsorbed depreciation being lower of business loss and unabsorbed depreciation as per clause (iii) of Explanation to section 115JA.
The Assessing Officer (“AO”) held that in the absence of any specific provision in section 115JA with respect to the manner of set off of carry forward losses, the provisions of the ITA relating to carry forward and set off of losses would apply. The AO further held that as per the provisions of the ITA, the profit of a year should be first set off against the business loss and thereafter unabsorbed depreciation would be set off. The AO accordingly adjusted the profits earned for the earlier assessment years against the business loss ignoring the losses carried forward for more than eight years. By doing so, the AO computed the business loss at Nil and this being the lower amount out of business loss and unabsorbed depreciation denied the deduction to the taxpayer while computing book profit.
Issue before the Tribunal :- Whether the business loss carried forward beyond a period of eight years can be deducted while computing book profit under section 115JA of the ITA?
Observations and Ruling of the Tribunal
• The provision of section 115JA of the ITA is a complete code by itself and subject to sub-section (4) overrides all other provisions of the ITA for the matters provided in section 115JA.
• The manner of determination of “Net Profit” under accounting principles and the manner of determination of total income under the ITA are different. Under the Companies Act, for accounting purposes, the loss of any year is not segregated into “Business loss” and “Depreciation loss”. Under the ITA, the loss computed under the head “Profits and Gains of Business” is segregated into “Business Loss” and “Depreciation Loss”. Since it is specifically provided in section 115JA that the business loss shall not include depreciation, it becomes necessary to bifurcate the brought forward loss as per books of account into “Unabsorbed business loss” and “Unabsorbed depreciation”.
• Under the ITA, business loss can be carried forward only for a period eight years and can be adjusted against business profits only. However, under the accountancy principles, there is no such restriction i.e. the loss can be carried forward for any number of years and it can be adjusted against the income from any source. The loss incurred in a year cannot be ignored i.e. it is not possible to omit past loss from the books of account under double entry system of accounting. The loss can only be adjusted against any types of income earned in the succeeding years.
• There is a variation between the ITA and the accountancy principles in respect of the manner of carry forward and set off of the losses. The ITA nowhere prescribes the manner of set off or modalities of carry forward and set off of loss to be followed for book purposes. Hence, the reference to other provisions of the ITA as specified under section 115JA(4) cannot have application for the said purpose.
• Accordingly, the restriction of eight years for carry forward and set off of business losses under the normal tax provisions was not applicable for computing book profit under section 115JA.
Conclusion :- Business losses carried forward beyond a period of eight years could be deducted in computing the book profit and hence the limitation of eight years for carry forward and set off of business losses under the normal tax provisions is not applicable while computing book profit under section 115JA of the Income tax Act, 1961.