Issue for consideration
U/s. 115JB
of the Income Tax Act, 1961, a company is required to computateits book profits
and pay the Minimum Alternate Tax at 18.5% of such book profits. Explanation 1
to section 115JB provides that the term “book profit” means the ‘profit’ as
shown in the statement of profit and loss for the relevant previous year
prepared under s/s. (2), as increased or reduced by certain items specified
therein. One of the items of reduction contained in clause (ii) is –
(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 statement of profit and loss.
There is
also a corresponding item of addition contained in clause (f) of the
explanation, which reads as under –
(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;
Section
10(2A) provides for an exemption in the case of a partner of a firm which is
separately assessed as such. The exemption is as under:
“in the
case of a person being a partner of 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 share in the profits of the firm in accordance
with the partnership deed bears to such profits;
Therefore,
where a company is a partner in a partnership firm, which is taxed separately
as a partnership firm, and the company is entitled to a share of profits of the
partnership firm, such share of profit that the company is entitled to, is not
only exempt u/s. 10(2A) from income tax, but is also to be excluded from the
book profit, by reducing such share of profit credited to the statement of
profit and loss under Explanation 1(ii) of section 115JB and in so computing
any expenditure, incurred for earning such share of profit, is required to be
added back while computing the book profit.
The issue
has arisen before the Income tax Appellate Tribunal as to whether, in a case
where the share of the company in the income of the firm is a ‘loss’ which has
been debited to the statement of profit and loss of the company, whether such
loss is required to be added to the book profit of the company , in the same
manner as the share of profit is reduced from the profit as per the statement
of profit and loss. While the Chennai bench of the Tribunal has taken a view
that such share of loss from the partnership firm is to be added back while computing
the book profit, the Mumbai and Kolkata benches have taken the view that such
share of loss is not required to be added back while computing the book profit.
Metro Exporters Ltd’s case
The issue
first came up before the Mumbai bench of the tribunal in the case of DCIT
vs. Metro Exporters Ltd 10
SOT 647.
In this
case, relating to assessment year 1997-98, the provision then applicable was
section 115JA, which was almost identical to section 115JB in respect of the
issue under consideration. It provided for a reduction from the net profit as
shown in the profit and loss account for the relevant previous year of the
amount of income to which any of the provisions of Chapter III applied, if any
such amount was credited to the profit and loss account.
The assessee had debited its share of loss of Rs. 46.94 lakh from a
partnership firm to its profit and loss account. In the initial assessment, the
assessee’s computation of book profits, wherein it had not added back such
share of loss to the book profits, was accepted by the AO. However,
subsequently, reassessment proceedings were initiated u/s. 148 on the ground
that the income chargeable to tax was under assessed by way of omission to
increase the book profit by the share of loss in the partnership firm amounting
to Rs. 46.94 lakh debited to profit and loss account while computing the book
profit as per provisions of section
115 JA. Such share of loss was added to book profits by the AO in the
reassessment proceedings.
In first
appeal, the Commissioner(Appeals) deleted the addition made in the reassessment
proceedings, holding the reassessment proceedings as not being in accordance
with law, besides holding that the addition of Rs. 46.94 lakh of share of loss
from partnership firm could not be made to the book profits.
Before the
Tribunal, the Department contested both aspects – the decision against validity
of the reassessment proceedings, as well as the merits of the addition made to
book profits. Before the Tribunal, it was argued on behalf of the Department
that sub-clause (f) of the Explanation to section 115 JA, provided that for the
purposes of the section, the profit meant the net profit as shown in the profit
and loss account for the relevant previous year prepared under s/s. (2) as
increased by the amount or amounts of expenditure relatable to any income to
which any of the provisions of Chapter III applied and that the sub-clause
applied in the case of the assessee. It was further argued that the word
‘income’ included ‘loss’ also, and therefore sub-clause (ii) to Explanation to
section 115JA applied to the assessee.
On behalf
of the assessee, it was submitted that the addition was wrongly made as Chapter
XII-B was a special provision relating to certain companies, and therefore had
to be strictly construed. It was submitted that the proposition that the word
‘income’ included ‘loss’ was not applicable to assessment framed under Chapter
XII-B of the Act. Further, it was argued that the ‘loss’ was not an
‘expenditure’, and therefore did not fall within the purview of sub-clause (f)
to Explanation to section 115 JA. It was further submitted that sub-clause (ii)
to the Explanation to section 115 JA applied only “if any such amount is
credited to the profit and loss account”. In the case of the assessee, the
share of loss from the partnership firm was not credited to the profit and loss
account, but was debited to the profit and loss account, and therefore
sub-clause (ii) also did not apply to the case of the assessee.
The
Tribunal noted that the assessee had debited its share of loss from the
partnership firm to its profit and loss account. It observed that the
provisions of Chapter XII-B were special provisions relating to assessment of
certain companies, whereby the income of certain companies chargeable to tax
for the relevant previous year was deemed to be an amount equal to 30% of such
book profit. Being special provisions applicable to certain companies,
according to the Tribunal, they had to be strictly applied. The income of the
assessee had to be computed in accordance with book profit of the assessee, and
the working of the book profit had to be made as per the provisions of Chapter
XII-B.
The
Tribunal held that the proposition that the word “income” included “loss” was
not applicable while computing the profit in accordance with the provisions of
Chapter XII-B. The Tribunal further found that the provisions of sub-clause (f)
of the Explanation to section 115 JA applied to the amounts of “expenditure”
relatable to any income to which any of the provisions of Chapter III applied.
According to the Tribunal, the share of loss from a partnership firm was not
synonymous with the word “expenditure” used in that sub-clause.
The
Tribunal further noted that sub-clause (ii) of the Explanation to section 115
JA applied to income to which chapter III applied, if such amount was credited
to the profit and loss account of the assessee. In the case before it, the
tribunal noted that the share of the assessee from the partnership firm was
loss, and was therefore debited to the profit and loss account of the assessee,
and could not have been credited to the profit and loss account of the
assessee. Since it was not a case of share of profit from a firm credited to
the profit and loss account of the assessee, the tribunal held that no addition
for the purpose of computation of the book profit under section 115 JA could be
made with regard to share of loss of the assessee from a partnership firm.
The ratio
of this decision of the Mumbai bench of the Tribunal has been appllied by the
Kolkata bench of the Tribunal in the case of CD Equifinance Pvt Ltd vs.
DCIT, ITA No 577/Kol/2016 dated 9.2.2018 in the context of section 115JB
for Assessment Year 2012-13.
Fixit (P) Ltd’s case
The issue
again came up before the Chennai bench of the Tribunal in the case of DCIT
vs. Fixit (P) Ltd 95 taxmann.com 188.
In this
case,the assessee was a partner in two partnership firms, and its share of loss
from the two firms was Rs. 2,11,346 and Rs. 68,564, respectively. Such share of
loss was debited to the profit &loss account of the assessee, but was not
added back by the assessee to the net profit while computing book profit u/s.
115JB.
The
Assessing Officer was of the opinion that share income from a firm being exempt
under Chapter III, even if such share was a loss, it had to be added back for
computing the profit u/s. 115 JB. He therefore added the share of loss of the
two firms to the profits as per the profit & loss account and computed the
book profit for the purpose of levying tax u/s. 115 JB accordingly.
The
Commissioner (Appeals) decided the first appeal in favour of the assessee, on
the ground that the Explanation to section 115 JB spelt out the additions that
could be made to the profits shown in the audited profit & loss account.
Share of loss from a partnership firm could not be considered as an expenditure
relatable to exempt income, and therefore though such share of loss was debited
to the profit &loss account, such share of loss could not be added back
while computing the book profit u/s. 115 JB.
Before the
Tribunal, on behalf of the Department, it was argued that clause (ii) of the
Explanation to section
115JB clearly mandated deduction of any income to which any of the provisions
of section 10 applied, if such amount was credited to the profit & loss
account. It was argued that loss incurred by a firm was carried forward in the
hands of such firm. When share of profits from firms were to be reduced, loss,
being a negative income, had to be added back to profits shown in the profit
&loss account. That would be equivalent to an addition.
The
Tribunal analysed the provisions of section115 JB, in particular the
Explanation to that section. It also analysed the provisions of section 10
(2A). According to the Tribunal, what was excluded from the total income by
section 10 (2A) was the share of the partner in the total income of the firm.
Since share of loss in the firm was not an expenditure relatable to any exempt
income, in the opinion of the Tribunal, clause (f) of the explanation did not
apply.
However,
according to the Tribunal, it was clause (ii) of the Explanation which was
applicable. That was on account of the fact that in the opinion of the
Tribunal, share of loss was nothing but share of negative income. Clause (ii)
of the Explanation mandated reduction of income to which section 10 applied, if
such income was credited in the profit & loss account. According to the
Tribunal, when share of income from a firm was exempt and required to be
excluded u/s. 10 (2A), necessarily the share of loss was also to be excluded.
In the view of the Tribunal, what the assessing officer had done was that by
adding the loss from the two firms to the profits, he was effectively reducing
the negative profit, since loss was nothing but negative profit.
The
Tribunal therefore upheld the addition made by the assessing officer of share
of loss from the partnership firms to the book profit of the assessee.
Observations
The
controversy surrounds adjudicating upon two important facets; whether a ‘loss’
could be termed as an ‘expenditure’ and be added back to the book profit and
whether the right to reduce an ‘income’ from the book profit would oblige a
company to add back its losses. In effect, both the Mumbai and the Chennai
benches of the Tribunal have accepted the position that the provisions of
clause (f) to section 115 JB, providing for add back of the expenditure, do not
apply to the share of loss from a partnership firm, since such loss is not an expenditure
in relation to exempt income. Therefore, there is no dispute on the first
aspect of the controversy.
The
dispute is only as to whether clause (ii) of the Explanation to section 115JB
applies so as to require the company to exclude the loss in computing the book
profit or add back the loss, otherwise debited to the profit & loss
account, to the book profit. That Explanation applies to “amount of income
to which any of the provisions of section 10 apply”. The issue therefore
revolves around whether the proposition that “income” includes loss would apply
in this case i.
The
provisions of Chapter XII-B are special provisions that carry a fiction for
taxing an artificially computed income termed as book profit which is far
detached from the income or the real income on which tax is payable under the
original scheme of taxation of the Act. Computing the book profit is a
convoluted exercise that is removed from the concept of income and seeks to tax
an income that can in no sense be termed as an income. In the circumstances, it
is a futile exercise to apply the understanding otherwise derived in
interpreting the main provisions of the Act that deal with the income or the
real income.In the context of the income taxation, which seeks to tax the real
income of a person, It is true that the term ‘income’ includes ‘loss’ but it is
equally true to restrict the application of such an understanding to such an
income and not extend it to artificial income or fictional income. The Supreme
Court in J.H. Gotla’s case, 156 ITR 323 laid down the law while
explaining the ordinary concept of income to hold that it includes loss, as
well. Application of this analogy to an artificially conceived income should be
avoided at all costs.
There are
however two more arguments in favour of the proposition that such share of loss
is not to be added back in computing the book profits. The first is that the
share of loss is not credited to the profit and loss account, as required by
clause (ii), but is debited to the profit and loss account. Besides clause (ii)
falls under the items to be deducted while computing book profits, and not
under the additions to be made while computing book profits.
Secondly,
one may draw support from the decision of the Mumbai bench of the Tribunal in
the case of Raptakos Brett & Co Ltd 69 SOT 383 in the context
of exemption of capital losses on sale of listed shares u/s. 10(38). In that
case, while holding that only gains arising from the transfer of a long term
listed equity share was exempt, and not loss, the Tribunal interpreted the term
“income arising from the transfer of a long term capital asset”. It drew a
distinction between a situation where an entire source of income was exempt,
and a situation where only certain types of income from a source were exempt.
According to the Tribunal, if the entire source is exempt or is considered as
not to be included while computing the total income, then, in such a case, the
profit or loss resulting from such a source does not enter into the computation
at all. However, if a part of the source is exempt by virtue of particular
provision of the Act for providing benefit to the assessee, it cannot be held
that the entire source will not enter into the computation of total income.
According to the Tribunal, the concept of income including loss applies only
when the entire source is exempt, and not in the cases, where only one
particular stream of income falling within a source is falling within the
exemption provisions.
In the
case of a partner of a partnership firm, the partnership firm is the source of
income. Remuneration and interest from the partnership firm are taxable, with
only share of profit from the partnership firm being exempt from tax.
Therefore, only one stream of income from the source is exempt. That being the
case, following the rationale of Raptakos Brett’s decision, “income”
would not include loss, and share of profit would not include share of loss.
Therefore, the share of loss from a partnership firm, though may be covered by
section 10(2A), is not an income for the purposes of clause(ii) of section
115JB , and is further not credited to the profit and loss account. That being
the case, it is not required to be added back while computing book profits.
The better
view seems to be that no adjustment to the net profit is required to be made in
respect of the amount of share in loss debited to the statement of profit &
loss of the company while computing book
profit u/s. 115JB.
