Is reduction of Carry forward Loss or Unabsorbed Depreciation while computing book profit (Sec.115JB) is notional?

Prepared by Ganesh R

Facts / Regulations

Section 115JB (‘this section’) of the Income Tax Act, 1962 (‘the Act’) provides the conditions for computing book profits. “Book profit” means the profit as shown in the statement of profit and loss for the relevant previous year including additions and reductions as specified in this section.

One of the following reduction is allowed while computing book profit as per Clause (iii) of Explanation 1 to this Section is

“the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account 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;”

Analysis of Section 115JB

It is clearly evident from the explanation that one of the items eligible for reduction while computing book profit would be the lower of brought forward loss or brought forward unabsorbed depreciation loss as per books of accounts. However, the section is silent on whether such reduction of loss is notional for the purpose of calculating book profit, or such reduction should result in set off of brought forward loss as per the books for usage in subsequent years.

Case laws

DCIT vs Binani Industries Ltd., (ITAT Kolkata, 2016)

Facts

The AO disallowed reduction of least of business loss or unabsorbed depreciation for the previous year, stating that the amount has already been reduced in preceding previous year while computation of book profits.

AO argued that the loss as per books of accounts once reduced from book profits in earlier years would not be available for reduction in the subsequent years for computing book profits. 

Judgement

The Hon’ble ITAT held that the least of the cash loss or depreciation loss once adjusted or reduced from book profits in earlier assessment years, do not vanish out of the books until it is wiped out by profits in subsequent years.

It was held that the losses (both cash loss and depreciation loss) would continue to remain in the books of Binani Industries accounts till it is wiped off by earning profits by the assessee company.

M/s. Go Airlines (India) Limited vs DCIT (ITAT Mumbai, 2018)

The Hon’ble ITAT following the Judicial precedent in DCIT vs Binani Industries Ltd., (ITAT Kolkata, 2016) allowed the reduction of least of unabsorbed depreciation or business loss while computing book profits, even if such reduction were claimed in computing book profits for preceding previous years.

Conclusion

In case of brought forward loss or unabsorbed depreciation as per Tax base, provisions of Sections 32(2) and 72 of the Act explicitly provides that the amount would be carried forward for set off in the succeeding years. Being such amount carry forwarded should be arrived at after deducting the amounts to which effect has already been given during the previous year.

Similar provisions are apparently not available in computing the book profits u/s.115JB of the Act.

By referring Clause (iii) of Explanation 1 to this Section of the Act it is understood that the reduction is the simple numerical figure being the amount of loss brought forward or unabsorbed depreciation whichever is less for the purposes of arriving at the book profit u/s.115JB of the Act. Therefore, it could be safely concluded that reduction of Carry forward Loss or Unabsorbed Depreciation while computing book profit (Sec.115JB) is notional.

While computing Book Profits, lower of the two amounts (business loss or unabsorbed depreciation) is to be considered for set-off. This is a notional adjustment by itself. Unless the profit & loss balance in the books does not get wiped off completely, this exercise of adjusting lower of the amounts shall continue to be followed.