JSW STEEL LTD vs. ASST CIT CIR 11(5),

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH “A”, MUMBAI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI ASHWANI TANEJA, ACCOUNTANT MEMBER

ITA No.75/Bang/2011 Assessment Year: 2004-05

M/s JSW Steel Limited, Assistant Commissioner Jindal Mansion, 5A, of Income Tax, Dr. G. Deshmukh Circle 11(5), Vs. Marg, Bangalore Mumbai – 400 026 PAN: AAACJ4323N

(Appellant) (Respondent)

Present for: Assessee by : Shri Kanchan Kaushal and Hirali Desai, A.R. Revenue by : Shri Alok Johri, D.R.

Date of Hearing : 21.10.2016 Date of Pronouncement : 13. 01.2017 O R D E R

Per: Amit Shukla, Judicial Member:

The aforesaid appeal has been filed by the assessee against impugned order dated 02.11.2010, passed by Ld. CIT (Appeals)-1, Bangalore in relation to the proceedings under section 154 read with section 143(3) read with section 250 for the assessment year 2004-05. In the grounds of appeal, assessee has raised following grounds:

“On the facts and in the circumstances of the case, the learned Commissioner of Income Tax (Appeals) [CIT(A)'] has legally erred in not directing the learned Assessing Officer ('AO') to consider the Book Loss of Rs.438.63 crores instead of Rs.172.36 crores, for the purpose of clause (iii) in the Explanation (1) to Section 115JB(2) of the Income Tax Act,

ITA No.75/Bang/2011 2 M/s. JSW Steel Limited (formerly known as Jindal Vijaynagar Steel Limited) 1961 (the Act') while computing Book Profits under Section 115JB of the Act. It is prayed that the learned AO be directed to consider the Book Loss of Rs.438.63 crores while computing Book Profits under Section 115JBof the Act.”

ITA No.75/Bang/2011 3 M/s. JSW Steel Limited (formerly known as Jindal Vijaynagar Steel Limited) taken pursuant to the amendment brought the by Finance Act, 2008, w.r.e.f. 1st April, 2001 by which the book profit was required to be increased by the amount of deferred tax and provision thereof debited to the P&L A/c and decreased by an amount of deferred tax credited to the P&L A/c. A direction was given by the then Ld. CIT(A) to the Assessing Officer vide order dated 09-07-2009, to verify the veracity of the claim and ascertain the correct position of loss or unabsorbed depreciation brought forward and rework the Book Profit as defined in Explanation 1 to section 115JB of the Act, if considered necessary. However, in the order giving effect passed by the Assessing Officer he denied the benefit to the assessee. His observations in this regard were as under -

"the assessee's petition for rectification based on the amendment had been rejected by an order passed on 31.12.2008. The net profit or loss to be recognised in the books of accounts is the figure arrived at after taking into account the total tax expense which includes both current tax and deferred tax and this view is also as per the General Accounting practice and the same is confirmed by the figures shown in the P&L A/c as "Loss brought forward from earlier years."

Based on the accounting Standard 5 and accounting standard 22, the assessee's claim of taking Rs. 438.63 crores instead of Rs. 172.36 crores for calculation of Book Profit u/s I I5JB(2) is incorrect."

In short the Assessing Officer observed that such issue had been raised by the assessee through rectification application dated June 18, 2008 which had been decided against the assessee vide order dated 31.12.2008. Therefore, instead of raising this issue by way of an additional ground seeking for issuance of a direction to Assessing Officer for verification of correctness of the

ITA No.75/Bang/2011 4 M/s. JSW Steel Limited (formerly known as Jindal Vijaynagar Steel Limited) computation, the assessee should have moved appeal separately against the order passed u/s. 154 of I.T. Act dated 31-12-2008. Nevertheless on merits his observations were as under:

“• The appellant's interpretation of the accounting standards (i.e. net loss should be arrived at before deducting income tax expense or adding income tax savings) for arriving at the definition of net loss is flawed.

• The AS 5 para 5 states that "All items of income and expense recognized in a period should be included in the determination of net profit or loss for the period unless an AS requires or permits otherwise".

• Further AS 22 para 9 states that "tax expense for the period comprising current tax and deferred tax should be included in determination of the net profit or loss for the period.”

• The net profit or loss to be recognized in the books of account is the figure arrived at after taking into account the total tax expense which includes both current tax and deferred tax.

• The amount of loss brought forward is as per the General Accounting practice and the same is confirmed by the figures shown in the P&L A/c. as "Loss brought forward from earlier years"

• The assessee's interpretation of Loss as per Books of Account, being a negative 'Book Profit', and hence, to arrive at "amount of loss brought forward as per books of accounts”, all adjustments as per sec. 115JB is to be done to the loss shown in the P&L A/c, is incorrect.

• The argument that the "Balance of loss carried to Balance Sheet" as shown in the P&L A/c is not the correct figure to be adopted for the amount of loss brought forward as per books of account is an incorrect position taken by the assessee.”

ITA No.75/Bang/2011 5 M/s. JSW Steel Limited (formerly known as Jindal Vijaynagar Steel Limited) Assessing Officer and considering the assessee’s submission, did not agree with the contention of the assessee and after analyzing the provisions of section 115JB in his own way, observed and as under:- “On a careful consideration of the facts brought before me, the basis of the AO's decision, and the arguments by the appellant, I am of the view that the appellant should not be allowed a deduction of Rs. 438.6 crores from the Book Profits as claimed by the AR instead of Rs.172.6 crores. The AO has acted correctly under Clause (iii) of Explanation 1 to s. 115B of the Act. The facts and reasons are as under-

i. a. The appellant in its original ROI, for the current year added back the DTL and claimed adjustment of brought forward losses of Rs. 438.63 crores under clause (iii) to Explanation 1 to s. 115JB of the Act.

b. Subsequently, the appellant filed revised computation of income, wherein it claimed deduction of DTL in lieu of settled law including that of the Calcutta High Court in the case of Balrampur Chinni Mills Ltd. (supra) and claimed adjustment of brought forward losses of 172.36 crores under clause (iii) to Explanation 1 to s. 115JB of the Act.

c. Due to the amendment, the AO added back the DTL to appellant's book profit however did not allow set off of losses of Rs. 438.63 crores which suffered DTA in earlier years under clause (iii) to Explanation 1 to s. 115JB of the Act.

d. The Act is silent as to whether losses of earlier years which suffered DTA has to be set off or not?

e. It is a fundamental rule of law of taxation that legislative intention in bringing out an Amendment should be drawn as far as practicable from literal interpretation of the language used and it must not be endeavored to supply words when the Act is silent even if such silence leads to double jeopardy or double taxation. It is beyond the powers of executive to venture into such activity because that

ITA No.75/Bang/2011 6 M/s. JSW Steel Limited (formerly known as Jindal Vijaynagar Steel Limited) would lead to opening a Pandora's Box. The best way to get the remedy is to go for the judicial procedure which will declare such provisions of the Act unconstitutional.

f. It is better to quote the Memorandum explaining the retrospective insertion of clause (h) and (viii) of Explanation 1 to s. 115 JB of the Act.

"The intention behind these add backs is that the items which mainly appear "below the line" in the profit and loss account should be added back to arrive at the "book profit" if they appear "above the line" in the profit and loss account. Section 115JB has not specifically provided for add back of some such "below the line" items like deferred tax, dividend distribution tax, etc. as they were thought to be included in the term "income-tax". However, there has been some ambiguity regarding add back of these items, if debited to profit and loss account.

With a view to clarifying the intention, it is proposed to insert a new clause after clause (g) of the Explanation 1 as so numbered so as to provide that the book profit shall be increased by the amount of deferred tax and the provision therefore, if debited to profit and loss account"

The above makes it crystal clear that the amendment was brought to nullify the decisions in the case of - ACIT Vs. Bairampur Chermi Mills Ltd., (2007) 297 ITR 15 (Kol-Trb) and also confirmed by the Calcutta High Court.

g. Here, the A.O. has followed the amended provisions literally. He has allowed the set off as per Clause (iii) to Explanation 1 to Section 115JB. The A.O. has also acted within the jurisdiction while giving effect to the decision of the CIT(A) by quantifying the right amount of brought forward losses of Rs.172.36/- Crores being less than the unabsorbed depreciation of Rs.488.23 Crores for the purpose of Clause (iii) to Explanation 1 to Section 115JB of I.T. Act after verification. He has only commented on the merits on the issue of rectification application filed by the appellant which he is

ITA No.75/Bang/2011 7 M/s. JSW Steel Limited (formerly known as Jindal Vijaynagar Steel Limited) entitled to do because he has to give reasons for rejection of the rectification application and this is not adverse to the findings of the CIT(A). The Learned CIT (A) has allowed the set off. She has directed only to quantify the amount of loss for the purpose of computation of Book Profit u/s.115JB of the I.T. Act. After hearing the assessee, the A.O. has quantified the amount correctly. He has also found that the amount quantified earlier while rejecting the petition u/s. 154 of I.T. Act was correct amount. The learned CIT (A) has also not directed to modify the same. She has only directed to verify the correctness of quantification in the light of additional grounds of appeal which the AO has carried out in letter as well as spirit. Besides, the issue raised by the A.R. as to whether one would go for literal interpretation or purposive interpretation or in this case, the issue whether purpose interpretation is required or not are debatable issues and therefore not within the realm of provisions of Section 154 of the I.T. Act and therefore the A.O. has rightly refrained from commenting on such contentious issue. In this case I hold purposive interpretation is not required at all because the provisions of the Act are very clear and unambiguous. It says in clear terms the lesser of the two viz., brought forward loss and unabsorbed depreciation as per the books of account has to be reduced from the net profit and that is what has been done by the A. O. exactly.

h. The argument of A.R. that literal and strict interpretation is not desirable here because such would result in double jeopardy and double taxation is not in my realm to decide because indirectly it is being pleaded that the amendment is unconstitutional. This is not the right forum to raise or decide such issue.”

ITA No.75/Bang/2011 8 M/s. JSW Steel Limited (formerly known as Jindal Vijaynagar Steel Limited) on then legal position as enunciated by Kolkata Tribunal in the case of Balrampur Chinni Mills Ltd. which has also been affirmed by the Hon’ble Calcutta High Court, reported in 316 ITR 364. As per the revised computation the assessee also reduced the loss of Rs.172.36 crores in terms of clause (iii) to Explanation-1 of section 115JB. The loss was reduced to net of DTA on the premise that DTL would be allowed as deduction while computing the book profit for the purpose of MAT. Post these events there was a retrospective amendment to section 115JB(2) vide Finance Act, 2008, whereby the provision of deferred tax was required to be added back/reduced while computing the book profit under MAT which was brought by way of clarification. This was basically done to reverse the position taken by the Hon’ble Calcutta High Court (supra). The Ld. Counsel submitted that since assessee had already credited profit & loss account by crediting DTA to the profit & loss account for assessment years 2002-03 & 2003-04, therefore, assessee needs relief by reducing the deferred tax portion from the loss carry forward from the earlier years which is required to be reduced for the purpose of Explanation- 1 (iii) to section 115JB of the Act while computing the income under MAT for the year under consideration. He submitted that if the assessee’s contention is not accepted then it will lead to double jeopardy as the assessee is required to add back the provision made for DTL in the current year on account of the amendment and for setting off of losses, it will have to reduce and lower the amount of loss without making any adjustment of DTA credited in the earlier years. To demonstrate the double jeopardy suffered by the assessee, the Ld. Counsel filed a chart to show as to how it has lead to double taxation. In support of this contention, the Ld. Counsel placed reliance on the decision of Hon’ble Supreme Court in the case of CIT vs. JH

ITA No.75/Bang/2011 9 M/s. JSW Steel Limited (formerly known as Jindal Vijaynagar Steel Limited) Gotla 156 ITR 323. He further submitted that the words used in Explanation 1 (iii) to section 115JB of the Act "the amount of loss brought forward" should not be interpreted in a manner that it defeats the intention of the legislature and leads to absurdity and double jeopardy. The correct interpretation after the amendment is that the loss required to be set off under clause (iii) should be after adjustment of DTA till its reversal. Once the DTA credited prior to the amendment is reversed subsequently by debiting DTL (in the present case to the tune of Rs. 372.57 crores), then the strict interpretation should be followed. But, unless an adjustment is allowed to the loss in respect of DTA created (before amendment) the absurdity will remain. He further submitted that the ‘DTA’ credited to the P&L A/c is not an ‘income’ per se. It is accounted only on account of a timing difference by crediting to P&L A/c and creating an 'asset'. The asset which is created is not any amount which is receivable in the future. The same gets reversed in the years when the company starts making profits. Further, even under the normal computation the AO has not recognised the DTA as 'income' and only the gross loss after making adjustments under the Act (as per normal provisions) has been carried forward to the subsequent years. If DTA is not income, it cannot be reduced from the loss which is required to be carried forward for setting it off for the purposes of MAT. Thus, a consistency should be maintained both under the normal provision of the Act and also under MAT. Accordingly, by not granting adjustment of DTA in the carry forward loss, the assessee will be subjected to double jeopardy, once at the time of crediting DTL to book profits and in another instance when setting of reduced loss i.e. net of DTA as per clause (iii) to Explanation 1 of section 115JB of the Act.

ITA No.75/Bang/2011 10 M/s. JSW Steel Limited (formerly known as Jindal Vijaynagar Steel Limited) 5. On the other hand, the Ld. D.R. strongly relied upon the order of the Ld. CIT (A).

ITA No.75/Bang/2011 11 M/s. JSW Steel Limited (formerly known as Jindal Vijaynagar Steel Limited) (h), whereby the book profit was required to be increased by an amount of ‘deferred tax liability’ and provision thereof debited to the profit & loss account and decreased by an amount of ‘deferred tax asset’ credited to the profit & loss account; assessee who had not decreased the amount of ‘DTA’ but at the same time by virtue of retrospective amendment had to reduce the ‘DTL’ suffered the benefit of carry forward loss. The effect of the working of carry forward loss can be tabulated in the following manner:-

After Amendment Before Particulars Amendment Amounts in crores Amounts in crores Loss After Taxation 660.59 660.59 436.19 ----- Add: Deferred Taxes Provision 1096.78 660.58 Loss before Tax Unabsorbed 658.15 488.22 Depreciation Unabsorbed 438.63 172.36 Business Loss Amount eligible for 438.63 172.36 set-off u/s.115JB

Since the assessee has already credited the profit & loss account by crediting the ‘deferred tax asset’ to the profit & loss account for the assessment year 2002-03 & 2003-04, therefore, deferred tax portion needs to be reduced from the loss carry forward from the earlier years which is required to be reduced for the purpose of Explanation 1 (iii) to section 115JB while computing the income under MAT for the year under consideration. Now in wake of the amendment the assessee is required to add back the provision for deferred tax ability in the current year and for setting off of losses, if it is not allowed to

ITA No.75/Bang/2011 12 M/s. JSW Steel Limited (formerly known as Jindal Vijaynagar Steel Limited) reduce the lower of the amount of loss without taking any adjustment of deferred tax liability credited in the earlier years, it will definitely amount to double jeopardy to the assessee. This can be illustrated by way of following hypothetical example:

Particulars Year 1 Year 2 Year 3 Opening balance of loss _ -(200) -(250) Loss/Profit of the -(300) -(100) 1000 current year Total loss/Profit _ -(300) 750 Deferred Tax Asset of 100 50 _ the current year Deferred Tax Liability of _ _ -(150) current year Loss carried forward / -(200) -(250) _ Book loss Profit carried forward _ _ 600

MAT Computation Particulars As per AO As per Assessee Net Profit as per P&L A/c 850 850* *[Profit of c/y- 1000 Less: DTL- 150 Net profit- 850] Add: Deferred Tax Liability 150 150 Total 1000 1000 Less: Loss to be set off as per 250 400 clause (iii) of Explanation 1 of section 115JB Book Profit 750 600

ITA No.75/Bang/2011 13 M/s. JSW Steel Limited (formerly known as Jindal Vijaynagar Steel Limited)

ITA No.75/Bang/2011 14 M/s. JSW Steel Limited (formerly known as Jindal Vijaynagar Steel Limited) Act. He should make the suitable adjustment of deferred tax asset credited in the earlier year to the profit and loss (here it is loss) which is required to set be off in accordance with clause (iii) of Explanation-1 to section 115JB and to ensure that no double jeopardy is caused to the assessee. He should recalculate the amount of brought forward losses and correctly determine the book profit in accordance with the provisions of the law.

Sd/- sd/- (Ashwani Taneja) (Amit Shukla) ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai, Dated: 13.01.2017.

* Kishore, Sr. P.S.

Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench

//True Copy//

By Order

Dy/Asstt. Registrar, ITAT, Mumbai.