Section 115JB – Waiver of loan would not assume the character of income and hence, not part of book profit and adjustment in accumulated debit balance of profit & loss account through restructuring account to be disregarded for the purpose of computation of brought-forward losses

11. Windsor Machines Ltd. vs. DCIT (Mumbai) Manoj Kumar Aggarwal (A.M.) and Madhumita Roy (J.M.) ITA Nos. 2709, 2710 and 4697/Mum/2019 A.Ys.: 2013-14 and 2014-15 Date of order: 28^th May, 2020 Counsel for Assessee / Revenue: Pradip N. Kapasi and Akhilesh Pevekar / Vinay Sinha

Section 115JB – Waiver of loan would not assume the character of income and hence, not part of book profit and adjustment in accumulated debit balance of profit & loss account through restructuring account to be disregarded for the purpose of computation of brought-forward losses

FACTS

The assessee was declared a sick company under the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) and a rehabilitation Scheme was sanctioned. The Scheme envisaged several reliefs and concessions from various agencies, including certain tax concessions, viz., exemption from the provisions of sections 41, 72, 43-B and 115JB for a period of eight years from the cut-off date (i.e., 31^st March, 2009 as per the Scheme).

The assessee’s net worth turned positive on 31^st March, 2011, hence the BIFR discharged the assessee from the purview of SICA vide its order dated 16^th August, 2011. According to the DIT (Recovery), since the assessee was discharged by SICA on 16^th August, 2011 and its net worth turned positive by virtue of implementation of the revival Scheme, the assessee was precluded from relief u/s 115JB in view of Explanation 1(vii) to section 115JB(2) and, therefore, no relief would be available to it from A.Y. 2011-12 onwards from applicability of the provisions of section 115JB. The assessee prayed for reconsideration of the order pleading before the DIT (Recovery) that in terms of the BIFR Scheme, it was entitled to relief u/s 115JB for a period of eight years, i.e., up to A.Y. 2017-18.

In the meantime, the A.O., referring to the decision of the DIT (Recovery), held that the assessee would be entitled for relief u/s 115JB only up to A.Y. 2011-12. Accordingly, he computed book profits u/s 115JB at Rs. 1,076.27 lakhs which was nothing but profit shown by the assessee in the financial statements (after excluding exempt dividend income). The CIT(A), on appeal, upheld the order of the A.O.

HELD

According to the Tribunal, since the assessee was discharged by SICA on 16^th August, 2011 and its net worth turned positive by virtue of implementation of the revival Scheme, the assessee was precluded from relief u/s 115JB in view of Explanation 1(vii) to section 115JB(2) and, therefore, no relief would be available from A.Y. 2011-12 onwards.

The Tribunal also found substance in the contention of the assessee that

(a) the amount credited to profit & loss account on account of waiver of loan would not assume the character of income and hence should not form part of book profits u/s 115JB, and

(b) adjustment in accumulated debit balance of profit & loss account through restructuring account should be disregarded for the purpose of computation of brought-forward losses in terms of Explanation 1(iii) to section 115JB(2),

However, the Tribunal also noted that the issues had not been delved upon either by the A.O. or by the CIT(A). Therefore, on the facts and circumstances of the case, the Tribunal remitted the matter back to the file of the CIT(A).