DCIT CORPORATE CIRCLE 2(1), CHENNAI vs. FIXIT PVT. LTD., CHENNAI

आदेश / O R D E R PER ABRAHAM P.GEORGE, ACCOUNTANT MEMBER:

This appeal of the Revenue is filed with a delay of two days. Condonation petition has been filed. Delay is condoned and appeal admitted.

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computing the profit of the assessee for the purpose of applying Sec.115JB of the

Income Tax Act, 1961 (in short “Act”).

u/s.115JB of the Act, without adding back share of loss from two firms named

M/s.Fixit & Co., and M/s.Walker & Greig, of which, it was a partner, though such

losses were debited by the assessee in its Profit & Loss A/c. However, the Ld.AO

was of the opinion that share income from firm being exempt under Chapter-III of the

IT Act, even if such share was a loss, it had to be added back for computing the

profit u/s.115JB of the Act. Accordingly, he added the share loss of Rs.2,11,346/-

from M/s.Walker & Grieg and Rs.68,564/- from M/s.Fixit & Co., to the profits as per

the Profit & Loss A/c and computed the profit for the purpose of levying tax

u/s.115JB of the Act.

the assessee before the Ld.CIT(A) was that Explanation given u/s.115JB of the Act,

spelt out the additions that could be made to the profits shown in the audited Profit &

Loss A/c. According to the assessee, share of loss could not be considered as an

expenditure relatable to exempt income and therefore, though such share of loss

which was debited into Profit & Loss A/c, could not be added back while computing

profit u/s.115JB of the Act. The Ld.CIT(A) was appreciative to this contention and

deleted the additions made by the Ld.AR.

submitted that Clause(ii) of the Explanation given under section 115JB of the Act,

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clearly mandated, deduction of any income to which any of the provisions of Sec.10

applied, if such amount was credited to the Profit & Loss A/c. According to the

Ld.DR, loss incurred by a firm was to be carried forward in the hands of such firm.

As per Ld.DR, when share of profits from firms were to be reduced, loss being a

negative income, had to be added back to profits as shown in the Profit & Loss A/c.

This according to the Ld.DR, would be equivalent to an addition. As per the Ld.DR,

this was exactly what was done by the AO and the Ld.CIT(A) fell in error in deleting

such addition.

the contentions of the Ld.DR and also perused the orders. The AO had computed

profits for the purpose of application of Sec.115JB as under:

Computation of Tax u/s.115JA/JB :-

Profit as per Profit & Loss A/c : 6,86,465 Add: Share of loss from Walker & Grieg : 2,11,346 : Share of loss from Fixit & Co. : 68,564 : 2,79,910 -------------- -------------- Assessed Book Profit : 9,66,375 --------------

Loss A/c and the profit shown in the P&L A/c was after these debits. What can be

added to the profit as shown in the Profit & Loss A/c and what can be deducted from

such profits are given in the Explanations to Sec.115JB of the Act. Sec.115JB is

reproduced hereunder:

(1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2012, is less than eighteen and one-half per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of eighteen and one-half per cent.

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(2) Every assessee,— (a) being a company, other than a company referred to in clause (b), shall, for the purposes of this section, prepare its 76[statement of profit and loss] for the relevant previous year in accordance with the provisions of 76a[Schedule III] to the 76b[Companies Act, 2013 (18 of 2013)]; or (b) being a company, to which the 76c[second proviso to sub-section (1) of section 129] of the 76d[Companies Act, 2013 (18 of 2013)] is applicable, shall, for the purposes of this section, prepare its 76e[statement of profit and loss] for the relevant previous year in accordance with the provisions of the Act governing such company: Provided that while preparing the annual accounts including 76e[statement of profit and loss],— (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including 76e[statement of profit and loss]; (iii) the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including 76e[statement of profit and loss] and laid before the company at its annual general meeting in accordance with the provisions of 76f[section 129] of the 76d[Companies Act, 2013 (18 of 2013)] : Provided further that where the company has adopted or adopts the financial year under the 76d[Companies Act, 2013 (18 of 2013)], which is different from the previous year under this Act,— (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including 76e[statement of profit and loss]; (iii) the method and rates adopted for calculating the depreciation, shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including 76e[statement of profit and loss] for such financial year or part of such financial year falling within the relevant previous year. Explanation 1.—For the purposes of this section, "book profit" means the 77[profit] as shown in the 76e[statement of profit and loss] for the relevant previous year prepared under sub-section (2), as increased by— (a) the amount of income-tax paid or payable, and the provision therefor; or (b) the amounts carried to any reserves, by whatever name called, other than a reserve specified under section 33AC; or (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (d) the amount by way of provision for losses of subsidiary companies; or (e) the amount or amounts of dividends paid or proposed ; or

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(f) the amount or amounts of expenditure relatable to any income to which section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply; or (fa) the amount or amounts of expenditure relatable to income, being share of the assessee in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86; or (fb) the amount or amounts of expenditure relatable to income accruing or arising to an assessee, being a foreign company, from,— (A) the capital gains arising on transactions in securities; or (B) the interest, royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII, if the income-tax payable thereon in accordance with the provisions of this Act, other than the provisions of this Chapter, is at a rate less than the rate specified in sub-section (1); or (fc) the amount representing notional loss on transfer of a capital asset, being share of a special purpose vehicle, to a business trust in exchange of units allotted by the trust referred to in clause (xvii) of section 47 or the amount representing notional loss resulting from any change in carrying amount of said units or the amount of loss on transfer of units referred to in clause (xvii) ofsection 47; or 78[(fd) the amount or amounts of expenditure relatable to income by way of royalty in respect of patent chargeable to tax under section 115BBF; or] (g) the amount of depreciation, (h) the amount of deferred tax and the provision therefor, (i) the amount or amounts set aside as provision for diminution in the value of any asset, (j) the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset, (k) the amount of gain on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a value other than the cost through 79[statement of profit and loss], as the case may be; if any amount referred to in clauses (a) to (i) is debited to the 79a[statement of profit and loss] or if any amount referred to in clause (j) is not credited to the 79a[statement of profit and loss], and as reduced by,— (i) the amount withdrawn from any reserve or provision (excluding a reserve created before the 1st day of April, 1997 otherwise than by way of a debit to the 80[statement of profit and loss]), if any such amount is credited to the 80[statement of profit and loss]: Provided that where this section is applicable to an assessee in any previous year, the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation or Explanation below the second proviso to section 115JA, as the case may be; or

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(ii) the amount of income to which any of the provisions of section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply, if any such amount is credited to the 80[statement of profit and loss]; or (iia) the amount of depreciation debited to the 80[statement of profit and loss] (excluding the depreciation on account of revaluation of assets); or (iib) the amount withdrawn from revaluation reserve and credited to the 80[statement of profit and loss], to the extent it does not exceed the amount of depreciation on account of revaluation of assets referred to in clause (iia); or (iic) the amount of income, being the share of the assessee in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86, if any, such amount is credited to the 80[statement of profit and loss]; or (iid) the amount of income accruing or arising to an assessee, being a foreign company, from,— (A) the capital gains arising on transactions in securities; or (B) the interest, royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII, if such income is credited to the 80[statement of profit and loss] and the income-tax payable thereon in accordance with the provisions of this Act, other than the provisions of this Chapter, is at a rate less than the rate specified in sub-section (1); or (iie) the amount representing,— (A) notional gain on transfer of a capital asset, being share of a special purpose vehicle to a business trust in exchange of units allotted by that trust referred to in clause (xvii) of section 47; or (B) notional gain resulting from any change in carrying amount of said units; or (C) gain on transfer of units referred to in clause (xvii) of section 47, if any, credited to the 80a[statement of profit and loss]; or (iif) the amount of loss on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a value other than the cost through 81[statement of profit and loss], as the case may be; 82[or] 82[(iig) the amount of income by way of royalty in respect of patent chargeable to tax under section 115BBF; 83[or]] 84[(iih) the aggregate amount of unabsorbed depreciation and loss brought forward in case of a company against whom an application for corporate insolvency resolution process has been admitted by the Adjudicating Authority under section 7 or section 9 or section 10 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016). Explanation.—For the purposes of this clause, the expression "Adjudicating Authority" shall have the meaning assigned to it in clause (1) of section 5 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016) and the loss shall not include depreciation; or]

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(iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account 84[in case of a company other than the company referred to in clause (iih)]. 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; or (iv) to (vi) [***] (vii) the amount of profits of sick industrial company for the assessment year commencing on and from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses. Explanation.—For the purposes of this clause, "net worth" shall have the meaning assigned to it in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986); or 85[(viii) the amount of deferred tax, if any such amount is credited to the 85[statement of profit and loss]. Explanation 2.—For the purposes of clause (a) of Explanation 1, the amount of income-tax shall include— (i) any tax on distributed profits under section 115-O or on distributed income under section 115R; (ii) any interest charged under this Act; (iii) surcharge, if any, as levied by the Central Acts from time to time; (iv) Education Cess on income-tax, if any, as levied by the Central Acts from time to time; and (v) Secondary and Higher Education Cess on income-tax, if any, as levied by the Central Acts from time to time. Explanation 3.—For the removal of doubts, it is hereby clarified that for the purposes of this section, the assessee, being a company to which the 86[second proviso to sub-section (1) of section 129 of the Companies Act, 2013 (18 of 2013)] is applicable, has, for an assessment year commencing on or before the 1st day of April, 2012, an option to prepare its 87[statement of profit and loss] for the relevant previous year either in accordance with the provisions of 88[Schedule III to the Companies Act, 2013 (18 of 2013)] or in accordance with the provisions of the Act governing such company.] 89[Explanation 4.—For the removal of doubts, it is hereby clarified that the provisions of this section shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, if— (i) the assessee is a resident of a country or a specified territory with which India has an agreement referred to in sub-section (1) of section 90 or the Central Government has adopted any agreement under sub-section (1) of section 90A and the assessee does not have a permanent establishment in India in accordance with the provisions of such agreement; or

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(ii) the assessee is a resident of a country with which India does not have an agreement of the nature referred to in clause (i) and the assessee is not required to seek registration under any law for the time being in force relating to companies.] 90[Explanation 4A.—For the removal of doubts, it is hereby clarified that the provisions of this section shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, where its total income comprises solely of profits and gains from business referred to in section 44B or section 44BB or section 44BBA or section 44BBB and such income has been offered to tax at the rates specified in those sections.] 91[Explanation 5].—For the purposes of sub-section (2), the expression "securities" shall have the same meaning as assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956). 92[(2A) For a company whose financial statements are drawn up in compliance to the Indian Accounting Standards specified in Annexure to the Companies (Indian Accounting Standards) Rules, 2015, the book profit as computed in accordance with Explanation 1 to sub-section (2) shall be further— (a) increased by all amounts credited to other comprehensive income in the statement of profit and loss under the head "Items that will not be re-classified to profit or loss"; (b) decreased by all amounts debited to other comprehensive income in the statement of profit and loss under the head "Items that will not be re-classified to profit or loss"; (c) increased by amounts or aggregate of the amounts debited to the statement of profit and loss on distribution of non-cash assets to shareholders in a demerger in accordance with Appendix A of the Indian Accounting Standards 10; (d) decreased by all amounts or aggregate of the amounts credited to the statement of profit and loss on distribution of non-cash assets to shareholders in a demerger in accordance with Appendix A of the Indian Accounting Standards 10: Provided that nothing contained in clause (a) or clause (b) shall apply to the amount credited or debited to other comprehensive income under the head "Items that will not be re-classified to profit or loss" in respect of— (i) revaluation surplus for assets in accordance with the Indian Accounting Standards 16 and Indian Accounting Standards 38; or (ii ) gains or losses from investments in equity instruments designated at fair value through other comprehensive income in accordance with the Indian Accounting Standards 109: Provided further that the book profit of the previous year in which the asset or investment referred to in the first proviso is retired, disposed, realised or otherwise transferred shall be increased or decreased, as the case may be, by the amount or the aggregate of the amounts referred to in the first proviso for the previous year or any of the preceding previous years and relatable to such asset or investment. (2B) In the case of a resulting company, where the property and the liabilities of the undertaking or undertakings being received by it are recorded at values different from values appearing in the books of account of the demerged company immediately before the demerger, any change in such value shall be ignored for the purpose of computation of book profit of the resulting company under this section. (2C) For a company referred to in sub-section (2A), the book profit of the year of convergence and each of the following four previous years, shall be further increased or decreased, as the case may be, by one-fifth of the transition amount:

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Provided that the book profit of the previous year in which the asset or investment referred to in sub-clauses (B) to (E) of clause (iii) of the Explanation is retired, disposed, realised or otherwise transferred, shall be increased or decreased, as the case may be, by the amount or the aggregate of the amounts referred to in the said sub-clauses relatable to such asset or investment: Provided further that the book profit of the previous year in which the foreign operation referred to in sub-clause (F) of clause (iii) of the Explanation is disposed or otherwise transferred, shall be increased or decreased, as the case may be, by the amount or the aggregate of the amounts referred to in the said sub-clause relatable to such foreign operations.

Explanation.—For the purposes of this sub-section, the expression—

(i) "year of convergence" means the previous year within which the convergence date falls; (ii) "convergence date" means the first day of the first Indian Accounting Standards reporting period as defined in the Indian Accounting Standards 101;

(iii) "transition amount" means the amount or the aggregate of the amounts adjusted in the other equity (excluding capital reserve and securities premium reserve) on the convergence date but not including the following:—

(A) amount or aggregate of the amounts adjusted in the other comprehensive income on the convergence date which shall be subsequently re-classified to the profit or loss; (B) revaluation surplus for assets in accordance with the Indian Accounting Standards 16 and Indian Accounting Standards 38 adjusted on the convergence date;

(C) gains or losses from investments in equity instruments designated at fair value through other comprehensive income in accordance with the Indian Accounting Standards 109 adjusted on the convergence date; (D) adjustments relating to items of property, plant and equipment and intangible assets recorded at fair value as deemed cost in accordance with paragraphs D5 and D7 of the Indian Accounting Standards 101 on the convergence date;

(E) adjustments relating to investments in subsidiaries, joint ventures and associates recorded at fair value as deemed cost in accordance with paragraph D15 of the Indian Accounting Standards 101 on the convergence date; and

(F) adjustments relating to cumulative translation differences of a foreign operation in accordance with paragraph D13 of the Indian Accounting Standards 101 on the convergence date.]

(3) Nothing contained in sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of sub-section (2) of section 32 or sub-section (3) of section 32A or clause (ii) of sub-section (1) of section 72 or section 73 or section 74 or sub-section (3) of section 74A.

(4) Every company to which this section applies, shall furnish a report in the prescribed form93 from an accountant as defined in the Explanation below sub-section (2) of section 288, certifying that the book profit has been computed in accordance with the provisions of this section along with the return of income filed under sub-section (1) of section 139 or along with the return of income furnished in response to a notice under clause (i) of sub-section (1) of section 142.

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(5) Save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section. (5A) The provisions of this section shall not apply to any income accruing or arising to a company from life insurance business referred to in section 115B. (6) The provisions of this section shall not apply to the income accrued or arising on or after the 1st day of April, 2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic Zone, as the case may be: Provided that the provisions of this sub-section shall cease to have effect in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2012. 94[(7) Notwithstanding anything contained in sub-section (1), where the assessee referred to therein, is a unit located in an International Financial Services Centre and derives its income solely in convertible foreign exchange, the provisions of sub-section (1) shall have the effect as if for the words "eighteen and one-half per cent" wherever occurring in that sub-section, the words "nine per cent" had been substituted. Explanation.—For the purposes of this sub-section,— (a) "International Financial Services Centre" shall have the same meaning as assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005); (b) "unit" means a unit established in an International Financial Services Centre; (c) "convertible foreign exchange" means a foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Management Act, 1999 (42 of 1999) and the rules made thereunder.]

of Explanation-1 treating the share of loss from firms as not expenditure relatable to

any income u/s.10 of the Act. Section 10 (2A) which exempts share income from a

firm is reproduced hereunder:

(2A) in the case of a person being a partner of a firm which is separately assessed as such, his share in the total income of the firm. Explanation.—For the purposes of this clause, the share of a partner in the total income of a firm separately assessed as such shall, notwithstanding anything contained in any other law, be an amount which bears to the total income of the firm the same proportion as the amount of his share in the profits of the firm in accordance with the partnership deed bears to such profits;

10 is the share of the partner in the total income of the firm. Share of loss in a firm is

not an expenditure relatable to any exempt income and application of clause –f

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explanation was in our opinion incorrect. It was Clause (ii) of the explanation which was applicable. Share of loss in our opinion is nothing but share of negative income. Explanation (ii) to Section 115JB mandates reduction of income to which Section 10 applies, if such income is credited in the Profit & Loss A/c. When share of income from firm is exempt u/s.10 2(A) of the Act, necessarily share of loss is also exempt. What the AO did by adding the loss from the two firms to the profits was reducing, the negative Profit, since loss is nothing but negative profit. We are of the opinion what the Ld.AO did was in accordance with Clause(ii) of the Explanation and that the Ld.CIT(A) fell in error in relying on a wrong clause for giving relief to the assessee. Accordingly, we set aside the order of the Ld.CIT(A) and reinstate the addition made by the AO.

Order pronounced in the Open Court in June 26, 2018, in Chennai.

Sd/- Sd/- (एन.आर.एस. गणेशन) (अ�ाहम पी. जॉज�) (N.R.S. GANESAN) (ABRAHAM P.GEORGE) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER

चे�नई/Chennai, .दनांक/Dated: June 26, 2018. TLN

आदेश क) &�त/ल0प अ1े0षत/Copy to: 1. अपीलाथ%/Appellant 4. आयकर आयु2त/CIT 5. 0वभागीय &�त�न�ध/DR 2. &'यथ%/Respondent 6. गाड" फाईल/GF 3. आयकर आयु2त (अपील)/CIT(A)