Loss on sale of investment not deductible from book profits u/s 115JB

Pricol Limited Vs DCIT (ITAT Chennai)

ITAT Chennai held that as capital profit are to be excluded while computing book profit u/s 115JB, similarly, the adjustment of loss could also not be allowed u/s 115JB. Hence, loss on sale of investment could not be reduced from Book Profits u/s 115JB of the Income Tax Act.

Facts- The sole issue that arises for consideration in the present case is determination of Book-Profits u/s 115JB vis-à-vis loss suffered by the assessee on loss on investments.

Conclusion- Held that capital profits, which do not have component of income, are to be excluded while computing Book Profits u/s 115JB. On similar logic, the adjustment of loss could also not be allowed u/s 115JB. In other words, loss on sale of investment could not be reduced from Book Profits u/s 115JB. The Hon’ble High Court of Madras in CIT V/s Metal and Chromium Plater (P.) Ltd. clearly held that in terms of provisions of sub-section (5) of Sec.115JB, the assessment was open for application of all other provisions contained in the Income tax Act except if specifically barred by that section itself. Therefore, when gains on sale of investments were to be excluded being capital receipts, naturally, the book profits are to be increased by similar losses incurred on sale of investments. Accordingly, we confirm the view taken by lower authorities, in this regard and dismiss the grounds raised by the assessee.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

1. Aforesaid appeal by assessee for Assessment Year (AY) 2016-17 arises out of the order of learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [CIT(A)] dated 20-06-2022 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) of the Act on 24-12-2019. The grounds taken by the assessee are as under:

(1) On the facts and circumstances of the case and in light of law, the Learned CIT(A) has erred in holding that Rs.55,05,28,777/-, being capital loss on sale of investments and on cancellation of investments in M/s. Pricol Pune Limited, have to be adjusted against/added to the book profit computed u/s 115JB.

(2) The Learned CIT(A) ought to have noted that the Hon’ble Supreme Court in the case of Apollo Tyres, reported in 255 ITR 273, has categorically stated that while arriving at the book profit, no adjustment, other than those permissible as per the explanation to the provisions of section 115J, shall be permitted so long as the Profit and loss account has been prepared in accordance with Schedule VI to the Companies Act and the same has been certified by the Statutory Auditors. The Learned CIT(A) has erred in ignoring the principle upheld by the Hon’ble Supreme Court.

(3) The Learned CIT(A) failed to note that section 115JB is an independent code and computation of taxable book profit shall be made strictly applying the provisions of Explanation 1 to section 115JB(2), which contains the list of items by which the profit as shown in the Statement of Profit and Loss can be increased vide clauses (a) to (k) listed in Explanation 1. Further, the said Explanation 1 also contains the list of items which should be reduced in arriving at the book profit vide clauses (i) to (viii).

(4) The Learned CIT(A) ought to have noted that your Appellant, only to be consistent with the stand taken by it in earlier assessment years, had offered to tax the capital loss while computing the book profit u/s 115JB by adding the same to the book profit.

(5) The Learned AO, while completing the scrutiny assessment ought to have excluded the adjustment/ addition made by your Appellant, which was consistently done by the Learned AO in the previous years while arriving at the taxable book profit but instead went wrong in accepting the adjustment/addition made by the Appellant merely because the exclusion of the same would have resulted in lesser taxable income.

(6) The Learned CIT(A) ignored the detailed submissions made by your Appellant and proceeded to uphold the order of the Learned AO, thereby compromising the principle of consistency and also ignoring the principle upheld by various Appellate authorities including the Hon’ble Supreme Court.

(7) The Learned CIT(A) erred in concurring with the Learned AO that an adjustment to the book profit, other than those permitted in the relevant section of the Income Tax Act, is acceptable to the IT department when it is resulting in a higher income. This approach is against the principles of natural justice and also unlawful.

(8) The Learned CIT(A) ought to have noted that the Learned AO had filed an appeal in your Appellant’s own case for AY 2014-15 on 25-11-2019 before the Hon’ble Income Tax Appellant Tribunal on the very same issue claiming that the profit on sale of Assets/ investments should not be adjusted to / excluded from the book profits and subsequently within a period of one month took a totally contrary stand in the Assessment order passed for AY 2016-17 on 24-12-2019 only because the adjustment made by the Appellant on the principle of consistency was favourable to the department.

(9) Your Appellant relies on the decisions of the Hon’ble Supreme Court in National Thermal Power Company Limited Vs. Commissioner of Income Tax reported in 229 ITR 383 and in the case of WIPRO Finance Limited reported in 443 ITR 250 wherein the Hon’ble Supreme Court has clearly stated that whether or not the assessee has raised certain issues during the assessment proceedings, the Appellate Authorities are duty bound to consider the same on merits when it is raised before them for the first time.

(10) The Learned CIT(A) ought to have noted that the purpose of assessment proceedings before the taxing authorities is to assess the correct taxable income in accordance with law. When an assessee claims an expenditure which should not be allowed or when an assessee offers to tax an income which should not be taxed, it is the duty of the Assessing officer to apply the provisions of law in its letter and spirit, to ensure that the correct amount of income is brought to tax, irrespective of the claims made by the assessee.

(11) The learned CIT(A) is incorrect in law to have not addressed a specific ground raised by your Appellant on non consideration by the Learned AO of a detailed Note I objection filed during the assessment proceedings on the subject of excluding the addition of Capital Loss to the Book profit and did not discuss in the order as to why she had not accepted the objection raised by the Appellant.”

As is evident, the sole issue that arises for our consideration is determination of Book-Profits u/s 115JB vis-à-vis loss suffered by the assessee on loss on investments.

2. Supporting the case of the assessee, Ld. AR submitted that the assessee incurred loss on sale of investments which was debited to Profit & Loss Account. However, keeping in view the consistent methodology being followed by the assessee, the same was excluded while computing Book-Profits u/s 115JB in the revised return of income. In other words, Book-Profits were increased to the extent of loss suffered on investments. The Ld. AR submitted that the said methodology was confirmed in first appellate orders for AY 2013-14 as well as in AY 2014­15 in assessee’s favor. The revenue could not prefer further appeal for AY 2013-14 due to low tax effect whereas in AY 2014-15, the assessee settled the issue under Vivad Se Vishwas Scheme, 2020. In AY 2015-16, this issue does not arise at all. The Ld. AR submitted that considering the stand taken by revenue in earlier year during assessment proceedings, the loss should be adjusted in this year while computing Bok-Profits u/s 115JB. The Ld. CIT-DR, on the other hand, submitted that in AY 2013-14, the assessee’s methodology has been accepted and therefore, the loss could not be excluded in this year. Having heard rival submission and upon perusal of case records, the impugned issue is adjudicated as under.

Proceedings before lower authorities

3. The assessee being resident corporate assessee filed original return of income declaring ‘Nil’ income under normal provisions and Book-Profits u/s 115JB for Rs.60.93 Lacs. However, in the revised return filed on 04.10.2017 and 22.03.2018, the book-profits were revised to Rs.38.39 Crores and Rs.29.83 Crores respectively. The Ld. AO framed the assessment u/s 143(3) and re-computed Book-Profits u/s 115JB after adding back claim of excise duty exemption.

4. The assessee preferred further appeal before Ld. CIT(A) and filed supplementary grounds of appeal. It was submitted that the assessee incurred loss on sale of investments for Rs.38.77 Crores. Another loss of Rs.16.28 Crores was suffered on surrender / cancellation of investment in M/s Pricol Pune Limited. The total loss thus suffered was Rs.55.05 Crores. The assessee submitted that the said loss was offered to tax u/s 115JB but the same should be excluded from book-profits considering consistent view taken by the department in earlier years. In earlier years, the assessee took the stand that capital profit from sale of investments / capital assets should not be brought to tax u/s.115JB and therefore, the same should be excluded from book profits. However, the department did not agree with the assessee and proceeded to assess capital profits to tax u/s.115JB. In the present year, the assessee incurred capital loss and therefore, the same treatment should be given to losses. The assessee did not press the issue of adjustment of excise duty exemption u/s 115JB since the assessee had opted to settle the issue in earlier year under Vivad Se Vishwas Scheme, 2020.

5. However, rejecting assessee’s submissions, Ld. CIT(A) upheld the stand of Ld. AO qua adjustment of loss on investments as under: –

(iii) The grounds of appeal No. 10 and the supplementary grounds of appeal relate to Capital loss on sale of investments/loss on investments in Pricol Pune Limited which was offered to tax by appellant company being consistent with the stand taken in the earlier years. The Capital loss on sale of investments amounted to Rs.38,77,00,065/- and loss on investment due to merger amounted to Rs.16,28,28,712/-, the total being Rs.55,05,28,777

lt is observed from the computation of book profit for A.Y. 2016-17 that loss on sale of investment and loss on investment consequent to merger, amounting to Rs. 55.05 crore have been offered to tax by the assessee by adding back this amount to the profit for the year as per books of accounts. It is submitted by the assessee that a note was filed stating that the loss on sale of investment, though offered for book profit tax u/s 115JB to be consistent with the previous stand, should be excluded for the purpose of assessment on the ground that the department has held previously that no adjustment should be made to the book profit in respect of profit/loss on sale of assets/investments. This was also mentioned in note attached to Statement of total income filed along with the return of income. However, in the assessment order dated 24.12.2019, the Assessing Officer accepted the working given by the assessee in respect of computation of book profit and ignored the note I submission given by the assessee.

In the grounds of appeal No. 10 and supplementary grounds of appeal No. 2, the assessee has submitted that Assessing Officer was not consistent with the stand taken by him in previous years and was choosing a method / adjustment which favoured the Revenue.

I have carefully considered the submission of the assessee and facts of the case. I have also perused the assessment orders and order of CIT (A) for A.Y. 2013-14 & A.Y. 2014-15. In both these years (A.Y. 2013-14 & A.Y. 2014-15) the appellant company in its return of income, excluded capital profits, represented by profits on sale of assets / investments from computation of book profits u/s 115JB of the Act, on the ground that such profits do not form part of book profits as they were in the nature of capital receipts falling outside the scope of section 4 & 5 of the IT Act, 1961. The Assessing Officer rejected the claim of the assessee in his assessment order for A.Y. 2013-14 (dated 25.03.2016 ) and A.Y. 2014-15 (dated 28.12.2016.)

The Ld. CIT(A) deleted the additions made by the Assessing Officer in both the years by holding that the capital profits have to be excluded from the working of book profit u/s 115JB. In A.Y. 2016-17 which is the year of appeal, the assessee incurred capital loss amounting to Rs.55,05,28,777/- which was offered to tax while computing book profit under section 115JB in order to be consistent with the stand taken earlier. The Assessing Officer did not make any adjustment while computing book profit in his assessment order dated 24.12.2019. The Assessing Officer thus, accepted the stand taken by the assessee while finalising the assessment for A. Y. 2016-17. No addition was made by the A.O. in the assessment order dated 24.12.2019 for A.Y. 2016-17 on this ground. In the assessment order for A.Y. 2013­14 and 2014-15, the Assessing Officer did not accept the stand taken by the assessee and made addition while computing book profit u/s 115JB of the I. T. Act. The addition made by the Assessing Officer were deleted by the CIT (A) in the both the years by holding that the Capital profits have to be excluded from the working of book profit u/s 115JB [Order of CIT (A) dated 01.10.2019 for A.Y. 2014-15 and 27.08.2019 for A.Y. 2013-14]. The Ld. CIT (A) also relied upon decision of Hon’ble Supreme Court in the case of NTPC Co. Ltd. Vs. CIT (1998) 229 ITR 38C(SC). I am in respectful agreement with the stand taken by the Ld. CIT(A) that Capital profit / loss should not be part of book profit u/s 115JB. As the Assessing Officer has made no addition on this grounds in A.Y. 2016-17 and thus agreeing with the stand of the assessee, hence no intervention is required at the appellate stage by the CIT(A), which is also in line with the stand taken by the Ld. CIT(A) in A.Y. 2013-14 & 2014­-15.

The grounds of appeal of the assessee as mentioned above, are therefore dismissed.

Aggrieved as aforesaid, the assessee is in further appeal before us.

Our findings and Adjudication

6. Upon perusal of assessee’s revised return of income, it could be seen that the assessee has computed Book-Profits u/s 115JB after adding back impugned loss on sale of investments aggregating to Rs.55.05 Crores. In the annexure-1 to statement of total income, the assessee has stated as under: –

Note-1

The company has in earlier years filed revised returns to exclude capital profits represented by profit on sale of assets / investments, from 115JB on the ground that such profits shall not form part of book profits as they were in the nature of capital receipts falling outside the scope of section 4 and 5 of the Income Tax Act, 1961. The claims have been rejected during the course of assessment proceedings against which the Company as preferred appeals. On similar grounds and to be consistent with the earlier stand, the capital loss, represented by loss on sale of investments / assets, are included in the computation of book profits. In case the appeals are adjudicated against the company, then the loss would have to be excluded for the purpose of computation of book profits and to that extent the profits shall stand reduced.

Note-2

Loss on cancellation of investments represents the difference between the cost of investment in subsidiary, Pricol Pune Limited for Rs.262.829 million and the paid-up share capital of Pricol Pune Limited of Rs.100 million. Consequent to the amalgamation, the investment in transferor company and the paid-up share capital in the transferee company have been cancelled. As explained in point 1 above, the capital loss rising on cancellation of investment is included in the computation of profits on similar grounds. In case the appeals are adjudicated against the company, then the loss would have to be excluded for the purpose of computation of book profits and to that extent the profits shall stand reduced.

Quite clearly, the assessee holds a consistent position that capital gains on sale of investments / assets are to be excluded while computing Book Profits u/s 115JB. Conversely, any loss arising on such sale would not be adjusted in Book Profits and the Book-Profits, to that extent, are to be increased by the amount of loss debited in the Profit & Loss Account. Following this consistent policy, the assessee has increased the Book Profits to the extent of loss suffered and debited in the Profit & Loss Account.

7. We find that in Assessment Year 2013-14, the assessee earned profits on sale of investments for Rs.51.14 Lacs and offered the same to tax u/s 115JB. The assessee also earned excise duty exemption for Rs.14.65 Crores. Initially, the assessee offered the same to tax u/s 115JB. However, in the revised return, the assessee reduced the same from Book-Profits. During assessment proceedings, the assessee pleaded for exclusion of these two items which was rejected by Ld. AO. However, upon further appeal, Ld.CIT(A) adjudicated the issue of profit on sale of investments in assessee’s favor and held that such profits, being capital receipts, are to be excluded from Book Profits u/s 115JB. Regarding excise duty exemption, it was held that no such gains were included in Profit & Loss Account which calls for exclusion. Accordingly, this claim was rejected. Apparently, the revenue could not prefer any further appeal against the same due to low tax effect. This issue of profit on sale of investments, thus, attained finality in assessee’s favor in AY 2013-14 wherein such profits have been held to be capital profits and hence, excludible u/s 115JB. The assessee preferred further appeal qua excise duty exemption but settled the issue in Vivad Se Vishwas Scheme, 2020.

8. In AY 2014-15, the assessee included profit on sale of assets, profit on slump sale and excise duty exemption aggregating to Rs.66.51 Crores u/s 115JB but excluded the same in revised return of income. The Ld. AO rejected the claim during assessment proceedings. The Ld. CIT(A), inter-alia, relied on the decision of Hon’ble Apex Court in Rama Synthetics Ltd. (330 ITR 360) and various other decisions of the Tribunal, to hold that capital profits of Rs.50.56 Crores on sale of investments / slump sale are to be excluded u/s 115JB whereas revenue profit of Rs.1.23 Crores are to be included u/s 115JB. The claim of excise duty exemption was adjudicated against the assessee primarily on the ground that the assessee could not seek exemption from revenue which was never part of it. The revenue as well as assessee assailed the appellate order before Tribunal wherein it transpired that the assessee settled both the appeals under Vivad Se Viswas Scheme, 2020 and accordingly, the appeals were dismissed as withdrawn vide separate orders of Tribunal. The issue, thus, substantially stand settled in assessee’s favor in this year also. The Profit of Rs.1.23 Crores was found to be revenue in nature whereas excise duty exemption was found to be not a part of revenue and therefore, rejected.

9. In AY 2015-16 also, the assessee offered excise duty exemption u/s 115JB but withdrawn the same in revised return of income. The Ld. AO rejected the same. Though the assessee preferred further appeal, it preferred to settle the same under Vivad Se Vishwas Scheme, 2020.

10. From the above stated facts, it could be seen that though the assessee initially offered the profits on sale u/s 115JB, however, it withdrew all such claims in the revised return of income. In AYs 2013-14, this issue of profit on sale of investments has been settled in assessee’s favor. In AY 2014-15 also, substantial claim has been accepted wherein such profits have been excluded u/s 115JB. Therefore, to contend that the loss should be excluded u/s 115JB in this year, considering consistent stand taken by revenue in earlier years, is bereft of any merits. The assessee, though initially offered the profits u/s 115JB, however, later on withdrew such computation in revised return of income. Therefore, it could not be said that the assessee has taken consistent stand in the matter of treatment of profit / loss on sale of investments. The rule of consistency would not apply to the facts of the present case.

11. In our considered opinion as well as per settled legal position, capital profits, which do not have component of income, are to be excluded while computing Book Profits u/s 115JB. On similar logic, the adjustment of loss could also not be allowed u/s 115JB. In other words, loss on sale of investment could not be reduced from Book Profits u/s 115JB. The Hon’ble High Court of Madras in CIT V/s Metal and Chromium Plater (P.) Ltd. (415 ITR 123) clearly held that in terms of provisions of sub-section (5) of Sec.115JB, the assessment was open for application of all other provisions contained in the Income tax Act except if specifically barred by that section itself. Therefore, when gains on sale of investments were to be excluded being capital receipts, naturally, the book profits are to be increased by similar losses incurred on sale of investments. Accordingly, we confirm the view taken by lower authorities, in this regard and dismiss the grounds raised by the assessee.

12. The appeal stand dismissed.

Order pronounced on 20^th July, 2023