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Income Tax Appellate Tribunal, “B’’BENCH : BANGALORE
Before: SHRI B.R BASKARAN & SHRI PAVAN KUMAR GADALE
Both the appeals filed by the assessee aredirectedagainstthe orderspassed by ld CIT(A)-7, Bengaluru and they relate to the asst. years 2011-12 and 2012-13.Since one of the issuesurged in theseappeal is identical in nature, they were heard together and are being disposed of by this common order, for the sake of convenience.
The assessee is engaged in the business of manufacture and sale ofpharmaceuticalproducts.
The common issue urged in both the appeals relate to disallowance of depreciation claimed by the assessee on “software’ by invoking provisions of sec. 40a(ia) of the Act. The facts relating thereto are stated in brief.
The assessee had purchased software in the financial year relevant to the asst. year 2010-11 and capitalized the same. Accordingly, the assessee claimed depreciation onthe software so purchased. The AO in asst. year 2010-11, took the view that the payment made for purchase of software is in the nature of royalty and hence it is liablefor deduction of tax at source. Since the assessee did not deduct tax at source, the AO disallowed the depreciation claimed by the assessee in asst. year 2010-11 by invoking provisions of sec. 40(a)(ia) of the Act. During the years under consideration also, the assessee claimed depreciation on the WDV value of software. Following the decision taken by the AO in asst. year 2010-11, the AO disallowed the depreciation claimed on software by invoking provisionsof sec. 40(a)(ia) of the Act. The ld CIT(A) also confirmed the same.
At the time of hearing,theld AR submitted that the issue of disallowance made u/s 40(a)(ia) of the Act was carried to the Tribunal in the assessment year 2010-11. The tribunal, vide its order dated 13/4/2017 passed in has held that the provisions of sec. 40a(ia) cannot be invoked for making disallowance of depreciation. In this regard the Tribunal has followed the decision rendered by another coordinate bench in the case of M/s Kavasaki Micro Electronics Inc Vs. DDIT (IT(TP)A No.1512/2010 dated 26/6/2015). Accordingly the ld AR submitted that this issue has since been settled by the Tribunal in favour of the assessee. Accordingly he submitted that the disallowance made by the AO in both the years and confirmed by ld CIT(A) should be reversed.
We heard ld DR and perused the record. We noticed that the coordinate bench has taken the view intheassessee’sown case in asst. year 2010-11 thatthe provisions of sec. 40(a)(ia) cannot be invoked for disallowing the claim of depreciation. Accordingly, consistent with the view taken by the coordinate bench, we set aside the order passed by the ld CIT(A) on this issue in both the years and direct the AO to delete the depreciationdisallowed u/s 40(a)(ia) of the Act in both the years.
We shall now take up the individualissuesagitated in each of the year.
In asst. year 2011-12, the issue contested by the assessee relates to the determination of book profit u/s 115JB of the Act. As per clause (iii) of Explanation 1 to sec. 115JB of the Act, “amount on loss brought forward or unabsorbed depreciation whichever is less as per books of account” is required to be deducted from Net Profit for the purpose of determination of Book Profit. The dispute here is related to the determination of the “amount of loss forward or unabsorbed depreciation whichever is less as per books of account”.
The assessee deducted a sum of Rs. 67.45 lakhs as the “amount of brought forward loss or unabsorbed depreciation whichever is less as per books” under clause (iii) of Explanation 1 to sec.115JB of the Act. The AO did not agree with the computation made by the assessee. The AO, apparently following the decision rendered by Authority for Advance Rulings in the case Rastriya Ispat Nigam Ltd.(285 ITR 1 AAR), reworked the amount deductible under clause (iii) and determined the amount as 35.66 lakhs as against claimof Rs.67.44 lakhs. The ld CIT(A) also confirmed the same.
The ld AR submitted that the assessee has started incurring loss from asst. year 2004-05 and the loss has been segregated into business loss and depreciation. When the assessee made profits in intervening years;the said profit was adjusted against lower of “unabsorbed depreciation” or “brought forward business loss”. He submitted that the opening balance of accumulated loss as per books as on 1.4.2010was Rs.374.24 lakhs, which is required to be segregated into “unabsorbed depreciation” and “brought forward business loss”. Under the methodology followed by the assessee, the component of “brought forward business loss”wasRs.67.44 lakhs and “unabsorbeddepreciation” wasRs.306.81 lakhs. Lower of the above said twoamounts, being 67.44 lakhs, the assessee has deducted the same from Net Profit for computing book profit u/s 115JB of the Act.
The ld AR submitted that the AO has followed a different methodology. He determined the lower of business loss or unabsorbeddepreciation for asst. year 2004-05, 2007-08 and 2008-09 i.e the year in which the assessee incurred loss. The AO has deducted the profits made in asst. year 2005-06, 2006-07 and 2009-10 against the lossesso determined inthe other 3 years. Accordingly he arrived at a figure of 35.66 lakhs and deducted the same for the purposes of sec. 115JB of the Act. The ld AR submitted the methodology adopted by the AO, infact, did not segregate the accumulated loss of Rs.374.24 lakhs shown in the balance sheet as on 31/3/2010. Accordingly, the ld AR submitted that the methodology adopted by the assessee should be directed to be accepted.
On the contrary the ld DR submitted that the AO has followed the decision rendered by Authority for Advance Rulings in the case Rastriya Ispat Nigam Ltd.
We have heard the rival contentions on this issue and perused the record. We noticed that an identical issue has been considered by the Ahmedabad Bench of Tribunal in the case of M/s Milan Intermediates LLP., (ITA No.209/Ahd/2018) dated 26/7/2018 and we noticed the Ahmedabad Bench of Tribunal has expressed the view which concurs with the methodology adopted by the assessee.For the sake of convenience, we extract below operative portion of the order passed by Ahmedabad bench of Tribunal in the above said case.
“8. We have carefully considered the rival submissions and perused the orders of the authority below and case laws cited. In the instant case, the short issue in controversy is computation of 'book profit' under section 1 15JB with reference to Explanation (1)(iii) below 1 15JB. The interpretation of Explanation is thus in question. In this backdrop, we take note of Section 115JB of the Act which contains a special mechanism i.e. Minimum Alternate Tax (MAT) whereby the tax liabilityof a corporate assessee determined as per normal and regularprovisions is to be tested against specified percentage of its booksprofits. Consequently, if the regular tax liability is lower, MAT becomes payable. MAT is to be computed with reference to Companies' accounting profit for the year after making specified adjustments. One of the critical adjustment is deduction of lower of brought forward losses or unabsorbed depreciation as per books of accounts. Explanation (1)(iii) to section 115JB also enjoins that no deduction is permissible if either amount is NIL. In a scenario, where a corporate assessee has incurred book losses (losses as per accounts subject to adjustments) in the initial years and has become profitable in later years, the book profits of later years with reference to Section 1 15JB shall be computed after setting off the lower of loss incurred or depreciation of the earlier years remaining unabsorbed against the accounting profits/book profits earned in succeeding years.
8.1 In this background, let us advert to Explanation 1(iii) to Section 11 5JB which enables an assessee to avail deduction from 'book profits' towards unabsorbed loss/unabsorbed depreciation whichever is less as per books of accounts. It will be apposite to reproduce theaforesaid clause to the Explanation for ready reference which reads as under: (iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account. Explanation. -For the purposes of this clause,- (a) The loss shall not include depreciation; (b) the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation is nil," 8.2 A bare reading of the Explanation quoted above would show that Clause (iii) to Explanation 1 to Section 1 15JB ('Explanation' in short) provides that while computing the book profits for the relevant assessment year for the purposes of Section 115JB, the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of accounts, is required to be reduced.
8.3 In this regard, it is firstly the case of the assessee that it is consistently following FIFO method for setting off year-wise brought forwarded losses. Following this method, unabsorbed loss of earlier year, longest outstanding, is first set off against the current year's bookprofit and thereafter in tandem. Secondly and importantly, while applying the aforesaid method, the assessee had first adjusted the book profit of the current year out of brought forward business losses accumulations in preference to the unabsorbed depreciation (quantified to the extent of the lower of the two) regardless of the fact that amount set off represents unabsorbed depreciation being a lower figure. It is the case of the assessee that this method has been adopted consistently on year to year basis. The AO, on the other hand, has purportedly declined to agree with the aforesaid policy of the assessee and hasrevised the figures of set off while computing the book profit as tabulated. The controversy essentially lies in the manner and methodology of reduction of current years' profits adopted by Assessee necessarily out of brought forward losses in preference to unabsorbed depreciation (subject to quantification of amount being lower of the two) irrespective of the fact that unabsorbed depreciation is lower than unabsorbed losses.
8.4 To illustrate, supposedly the assessee has carried forward unabsorbed loss of Rs.75 and unabsorbed depreciation of Rs.25 from the preceding financial year. The book profit is, say, Rs.35 in thecurrent year. The assessee has reduced Rs.25/- (being lower of unabsorbed losses and unabsorbed depreciation) from the book profit and adjusted the same under unabsorbed losses and consequently carried forward unabsorbed loss at Rs.50 and unabsorbed depreciation at Rs.25 in the succeeding assessment year as an available set off against the book profit of that year. While the assessee has propounded that the tax payer is fully entitled to exercise its discretion in claiming reduction out of unabsorbed losses in preference to unabsorbed depreciation in the absence of any specific suggestion in Explanation to Section 1 15JB, the Revenue, on the other hand, seeks to reduce the amount so adjusted from unabsorbed depreciation (being lower figure) and thus, grants benefit of carry forward under the head of 'unabsorbed loss' at Rs.75 and unabsorbed depreciation at Rs.0 (zero). Thus, as illustrated, notwithstanding that the assessee has restricted the quantification of set off to be lower to the two (namely unabsorbed loss and unabsorbed depreciation) but, however, has given primacy to unabsorbed losses in the matter of reduction and quantification ofunabsorbed loss in preference to unabsorbed depreciation available for set off in succeeding year. For doing so, it is the case of the assessee that in the absence of any particular form of methodology prescribed for set off in the Explanation and thus owing to Explanation being silent towards the position of law, the assessee, as per its option, is entitled to first reduce quantum of unabsorbed losses to the extent of book profits subject however to the lower of the unabsorbed depreciation as per its books of accounts.
8.5 On a conspectus on the facts of the case and on perusal ofExplanation, we do not consider the methodology adopted by theassessee in affirmative.
The controversy involves interpretation ofClause (iii) to Explanation 1 to Section 115.113. Clause (iii) (as reproduced the above) requires to be given full effect as per letter as well as in spirit. Apparently, it provides for deduction of lower of unabsorbed loss or unabsorbed depreciation out of book profits. Noticeably, benefit of Explanation to Clause (iii) is not available in the event either unabsorbed loss or unabsorbed depreciation becoming NIL. Thus, in the event where either of the two becomes zero, the assessee will not be entitled for set off against books profits as beneficially provided in Clause (iii) to Explanation 1. The spirit of the clause thus requires to be gauged from this restriction placed statutorily. If the methodology adopted by the assessee is endorsed, it may generally defeat a situation where one of the two i.e. unabsorbed loss and unabsorbed depreciation turning NIL. To give effect to the object of Clause (iii), we are of the view that like should be reduced from like and not differently. This means if the lower of the two happens to be unabsorbed depreciation, reduction need to be done from depreciationkitty and not out of unabsorbed loss. Doing so would give fair treatment to the language employed and will be in consonance with the object of Clause (iii) for the purposes of set off. 8.6 At this stage, we also take notice of the Ruling rendered by the Authority of Advance Rulings in the case of Rastriya Ispat Nigam Ltd. (supra) and find that almost similar view has been taken by the authority. While the ruling may not necessarily have the binding force, we are persuaded to adopt the view expressed by the authority rendered after objective analysis of facts. Thus, on first principles and without going into arithmetical accuracy of working of carry forward of set off losses etc., we are of the clear view that the methodology adopted by the assessee to prioritise set off of unabsorbed loss regardless of unabsorbed depreciation being lower is not in tune with the aim and object of Clause (iii) to Explanation 1 of Section 1 15JB of the Act. The decision rendered in the case of Eli Lilly relied upon by assessee does not provide answer to the controversy in issue. The Hon'ble Delhi High Court merely found that mistake, if any, is not in the nature of apparently mistake and thus not susceptible to rectification under s.154 of the Act. The issue raised by the assessee is therefore decided in negative on principle.”
We have noticed that the assessee has segregated the accumulated balance of Loss into Business Loss and Unabsorbed depreciation every year. From the table furnished by the assessee, we cull out the segregation made by the assessee and give the same below:- Financial year Profit/loss Business Loss Unab.depn. ----------------------------------------------------------------------------------- 2004-05 164.20** 87.42 76.78 2005-06 (-) Profit 10.07 -- 10.07 ----------- --------- ---------- 154.13 87.42 66.71 2006-07 (-) Profit 11.06 -- 11.06 ----------- ---------- ---------- 143.07 87.42 55.65 2007-08 (+) Loss 140.56 16.69 123.87 ------------ ---------- ---------- 283.63 104.11 179.52 2008-09 (+) Loss 204.42 77.13 127.29 ----------- ----------- ------------ 488.05 181.24 306.81 2009-10 (-) Profit 113.81 113.81 ----- ------------ ------------ --------- 374.24 67.43 306.81
============================================ As per the above said computation, the assessee has claimed Rs.67.43 lakhs, being the lower of “brought forward business loss” or “unabsorbed depreciation” under clause (iii) of Explanation 1 to sec. 115JB of the Act.
The computation made by the AO has been as under:- Lower of business loss or unabsorbed depreciation As on 31.3.2007 (unabsorbed depn.) 55.65 (+) Business loss 2007-08 16.69 Business loss 2008-09 77.13 ---------- 149.47 (-) Profit for FY 2009-10 113.81 --------- 35.66 ======
We have observed earlier that the “accumulated loss” as at the beginning of year has to be segregated into “business loss” and “Unabsorbed depreciation”. The methodology adopted by the assessee, in fact, segregates the accumulated loss of every year into two categories. The problem arises when the entity makes Profit in between year, i.e., the problem is whether the profit is to be set off against business loss or unabsorbed depreciation. We notice that the assessee has set off the profit made in the intermittent year against lower of Business loss or unabsorbed depreciation. We have noticed that the said methodology is in accordance with the view taken by Ahmedabad Bench of Tribunal. We further notice that the Ahmedabad benchhas also considered the decision rendered by Authority for Advance Rulings in the case Rastriya Ispat Nigam Ltd.,(Supra) in the above said decision. On the contrary, the methodology adopted by the AO do not segregate accumulated loss of every year into two categories. Accordingly we are of the view that the methodology adopted by the AO is not logical. Accordingly we hold that the methodology adopted by the assessee deserves to be accepted.In view of the above we set aside the order passed by the ld CIT(A) on this issue and direct the AO to accept the methodology adopted by the assessee.
We shalltake up the individual issue agitated by the assessee in asst. year 2012-13 whichrelates to disallowance made u/s 14A of the Act.
The AO noticed that the assessee has made investment in equity shares. However, the assessee did not make any disallowance u/s 14A of the Act. The assessee submitted that it has not received any dividend income during the year under consideration and hence it did not make any disallowance u/s 14A of the Act. The AO did not agree with the submission of the assessee and accordingly disallowed a sum of Rs.45,000/- under Rule 8D(2)(iii) of the Income-tax Rules out of administrative expenses. The ld CIT(A) confirmed the same.
The ld AR placed reliance on the decision rendered by coordinate bench of the Tribunal inthe case of M/s Alliance Infrastructure Projects Pvt. Ltd., Vs. DCIT (ITA Nos.220 &1043/Bang/2013) dated 12/9/2014 and submitted that no disallowance u/s 14A of the Act is called for when there is no exempt income
We heard ld DR and perused the record. Since the assesse has not received any dividend income no disallowance u/s 14A is called for as per the decision rendered by coordinate bench inthe case of Alliance Infrastructure Project Pvt. Ltd. (Supra). Following the same we set aside the order passed by the ld CIT(A) and direct the AO to delete the disallowance made u/s 14A of the Act inasst. Year 2012-13.
In the result, both the appeals of the assessee are allowed.