Monday, June 13, 2016

Unabsorbed depreciation deductible from book profits even if it was adjusted under rehabilitation Scheme

Facts:
a) The assessee-company made huge loss and its net worth got wiped out. Therefore, the case of the assessee was referred to BIFR under SICA. It was declared as 'sick' industrial unit. 

b) The Board has sanctioned the rehabilitation scheme and, all credit amounts lying in various accounts, such as, equity share capital account, share premium account, etc. were transferred to credit of rehabilitation account. Ultimately, the credit balance in that account was used to liquidate the debit balance of profit & loss account by way of transfer of debit balance of P&L to the rehabilitation scheme account to the extent of credit balance available therein.

c) Since the net worth of the company was negative till AY 2008-09, it was not under the obligation to pay book-profit tax as per clause(vii) of Explanation to section 115JB. During AY 2012-13, assessee claimed deduction of unabsorbed depreciation loss of earlier years while computing the book profit. However, AO denied such deduction. He held that once the assessee made credits in the P&L account by way of restructuring , then the debit balance would be considered as wiped out from the P&L account and thus no unabsorbed depreciation would be available for reduction under Section 115JB.On appeal, CIT(A) upheld AO’s order.


d) Aggrieved-assessee filed the instant appeal.

The ITAT held in favour of assessee as under:

1) According to the ld. CIT (A), the adjustment of debit balance in the profit & loss accounts credits in the rehabilitation scheme, ought to have been given full effect by the assessee in the accounts. It is not open for the assessee to opt for inconsistent method of accounting. 

2) However, the object of levy of tax under section 115JB is that book profit ought to be computed as per Part-II and Part-III of the Schedule-VI. What other accounting treatment has been given by the assessee for the purpose of any other scheme is totally irrelevant, because SICA has no overriding effect on the Companies Act.

3) Restructuring credits brought by the assessee to the profit & loss account against accumulated profit and loss/debit balance, while giving effect to the scheme sanctioned by the BIFR would not extinguish alleged loss and depreciation from the accounts of the assessee in actual terms. Such loss would be available to the assessee as per the accounts prepared under Part-II and III of Schedule-VI, and the assessee will be entitled to claim reduction of loss/unabsorbed depreciation, whichever is lower, from the book profit under clause (iii) of Explanation to Section 115JB, while making such computation for the purpose of section
115JB. - [2016] 70 taxmann.com 158 (Ahmedabad - Trib.)
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