BEFORE THE AUTHORITY FOR ADVANCE RULINGS

(INCOME TAX) NEW DELHI

==========
PRESENT
Honble Mr. Justice Syed Shah Mohammed Quadri (Chairman)
Mr. A.S.Narang (Member)

Wednesday, the nineteenth July two thousand and six

A.A.R. NO. 652 OF 2004

Name & address of

M/s. Rashtriya Ispat Nigam Ltd.,

Corporate Accounts Section
Finance & Accounts Department,
Administrative Building
Visakhapatnam Steel Plant,
Visakhapatnam-530 031
Andhra Pradesh

Commissioner concerned

Commissioner of Income Tax- I,

Vishakhapatnam.

Present for the Department

Shri Mahendra Singh,

Addl.Commissioner of Income-tax,
Vishakhapatnam

Present for the Applicant

Shri V.Ramachandran, Advocate

And others

RULING
(By Mr. A.S.Narang)

In this case an application under section 245Q(1) of the Income-tax Act,

1961, (hereinafter referred to as the Act) seeking advance ruling from the
Authority has been filed on 29.11.2004. The applicant is a company registered

under the Companies Act and being an Undertaking of the Government of India,
is a Public Sector Company.

The applicant was registered during 1982

(Assessment year 1982-83) and it commenced its commercial operations during

the previous year 1990-91 (Assessment Year 1991-92). During the previous
years 1990-91 to 1993-94, 1998-99 and 1999-2000, the applicant had
operational loss from business excluding depreciation, which could not be set off
in the absence of profits. In respect of the years 1994-95 to 1997-98, 2000-01
and 2001-02, the applicant had operational profit.
Under Section 115JB, in the case of an assessee being a Company, the
income tax payable on the total income as computed under the Act in respect of
any previous year relevant to the Assessment Year commencing on or after 1st
April, 2001 is less than 7-1/2 percent of the 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 @ 7 percent. Sub-section (2) of
Section 115JB requires every assessee, for the purpose of the said Section, to
prepare its Profit and Loss account for the relevant previous year in accordance
with the provisions of Parts II & III of Schedule VI to the Companies Act, 1956
subject to certain adjustments set out therein.

The explanation under Sub-

section (2) defines book profit and requires the net profit shown in the Profit and
Loss account as prepared under Sub-section (2) to be reduced by the amount of
loss brought forward or unabsorbed depreciation whichever is less, amongst
various other adjustments. The provisions of explanation shall continue to apply

for the subsequent years so long as the amount of loss brought forward or
unabsorbed depreciation does not become nil.
As at the end of the financial year 2001-02 (A.Y. 2002-03), the applicant
had business loss of Rs.1,755.00 crores (approximately) and unabsorbed
depreciation of Rs.3,227 crores (approximately) eligible to be carried forward.
During the financial year 2002-03 (A.Y. 2003-04) the applicant had a net profit of
Rs.521 crores (approximately). In terms of Sub-sec (2) of Section 115JB the net
profit has to be reduced by the business loss or unabsorbed depreciation
whichever is less and if the said adjustment is made there would be no book
profit liable for assessment u/s 115JB for the Assessment Year 2003-04.
For the financial year 2003-04 (A.Y.2004-05) the applicant reported a
profit of Rs.1547 crores (approximately). During the said year, the total brought
forward loss of Rs.4461 crores (approximately) shown in the profit and loss
account by the applicant comprises of business loss of Rs.1755 crores
(approximately) and unabsorbed depreciation of Rs.2706 crores (approximately),
the profit of Rs.521 crores (approximately) for the financial year 2002-03
(A.Y.2003-04) having been adjusted against the unabsorbed depreciation. It is
stated by the applicant that, in terms of sub-sec (2) of Section 115JB current
years profit has to be reduced by the business loss or unabsorbed depreciation,
whichever is less and accordingly the book profit for the financial year 2003-04
(A.Y.2004-05) would be nil. The applicant, therefore, would not be liable to pay
any advance tax for the assessment year 2004-05.

2.

While this is so, the assessing authority (hereinafter referred to as the

A.O.) called upon the applicant to make an ad hoc payment of around Rs.60
crores towards estimated advance tax liability and with a view to cooperate with
the Department the applicant paid Rs.60 crores in March 2004, without prejudice
to its claim that it is not liable for payment of minimum alternate tax for the
A.Y.2004-05. The A.O. proceeded on the basis that the profit of Rs.521 crores
(approximately) for the financial year 2002-03 (A.Y.2003-04) is adjusted against
the business loss of Rs.1755 crores (approximately) leaving a balance business
loss of Rs.1234 crores (approximately).

The net profit of Rs.1547 crores

(approximately) for the financial year 2003-04 (A.Y. 2004-05) was reduced by the
profit attributable to Export turnover amounting to Rs.233.45 crores arriving at the
balance profit of Rs.1313.55 crores. This was further reduced by the brought
forward business loss of Rs.1234 crores (being lesser than the unabsorbed
depreciation of Rs.3227 crores) and the taxable income was arrived at Rs.79.55
crores for the financial year 2003-04 (A.Y.2004-05). On the basis of the above
working, the A.O. concluded that the business loss to be carried forward was nil
for computing the book profit for the financial year 2004-05(A.Y. 2005-06) and
hence no deduction was called for on account of the unabsorbed depreciation.
Accordingly the projected profit of Rs.2250 crores was adopted as the book profit
for the financial year 2004-05 (A.Y.2005-06) for levy of minimum alternate tax.
On the facts stated above, the applicant has referred the following
questions for ruling by the Authority:

(a)

Whether, in a case to which Section 115JB applies, the

applicant has the option to set off the current years profit
against the loss brought forward or unabsorbed depreciation,
in its accounts, in a manner different from the manner adopted
for determination of book profit under Section 115JB?

(b)

Whether the applicant has discretion to set off the current

years profit, either against the loss brought forward or
unabsorbed depreciation? In the event of such set-off being
made by the applicant in one year, can it in the subsequent
years adopt a different method of set-off? Can the applicant
set off the current years profit partly against the business loss
brought forward and partly against unabsorbed depreciation in
such proportion at it might decide?

(c)

Whether the applicant having disclosed the aggregate loss

comprising loss brought forward and unabsorbed depreciation
as a consolidated figure in its Profit & Loss account, can for
the purpose of calculating the book profit under Section 115JB
bifurcate such consolidated loss into loss brought forward
and unabsorbed depreciation and avail the benefit of reduction
envisaged under Sub-section (2) of Section 115JB in a manner
most beneficial to it?

(d)

Whether it is open to the applicant to set off the current years

profit against the loss brought forward or unabsorbed

depreciation in a manner most beneficial to it subject,

however, to the provisions of Sub-section (2) and whether
such adjustment can be changed from year to year?
(e)

Whether the applicant can change the method of setting off

the current years profit against loss brought forward or
unabsorbed depreciation from year to year and whether that
amounts to a change in the method of accounting and requires
the approval of the Assessing Authority?

(f)

Which of the methods viz. the method adopted by the

applicant for calculating the book profit for the Assessment
Years 2004-05 & 2005-06 or the method adopted by the
Revenue for the aforesaid Assessment Years is the correct
method?

3.

The Commissioner in his comments has stated that the applicant claimed

business loss/unabsorbed depreciation for the financial year 1990-91 to 2001-02

i.e. for 12 years amounting to Rs.1755 crores being cumulative business loss
and Rs.3227 crores being unabsorbed depreciation.

For the subsequent

accounting years from 2002-03 to 2004-05 the applicant has shown net profit of
Rs.521 crores for 2002-03 and Rs.1547 crores for 2003-04 as per the audited
accounts of the company, and estimated profit of Rs.2250 crores for the period
2004-05. The applicant is liable for payment of income tax under the provisions
of section 115JB for the accounting years 2003-04 and 2004-05, there being no
dispute regarding computation of tax for the accounting years 2002-03, where

the tax liability is nil. That the net profit of Rs.521 crores for the year 2002-03 is
required to be reduced by brought forward loss of Rs.1755 crores which is lesser
than the aggregate unabsorbed depreciation of Rs.3227 crores. And accordingly
the loss to be carried forward for the next accounting year would be Rs.1234
crores(1755-521) and unabsorbed depreciation of Rs.3227 crores will remain
unaltered. That the applicant while computing the minimum alternative tax (MAT)
under section 115JB has followed the same method as adopted by the Revenue
however, for the purpose of carry forward of business loss/depreciation, the
applicant has altogether changed the manner by setting off current years profit of
Rs.521 crores against unabsorbed depreciation of Rs.3227 crores in its books of
account, instead of reducing the profit by accumulative business loss of Rs.1755
crores as done under the provisions of the section 115JB of the Act.

The

applicant has, therefore, computed the carry forward of unabsorbed depreciation

at Rs.2706 crores (3227-521) and unabsorbed business loss at Rs.1755 crores.
The same methodology has been adopted for the subsequent accounting year
i.e. net profit has been reduced by brought forward loss of earlier years for the
purpose of MAT under section 115JB but for the purpose of carry forward to the
subsequent year the same has been reduced by brought forward depreciation.
That the applicant has chosen its own methodology of carry forward of book
loss/book depreciation to either totally avoid or substantially reduce the MAT
liability under the provisions of section 115JB of the Act; ignoring CBDT Circular
No.495 para 36 under section 115J illustrating year wise carry forward and set
off of book loss/depreciation and its set off against subsequent years profit.

4.

A comparative presentation of the MAT liability according to the Revenue

and the applicant, would amply illustrate the contentious issue.

COMPUTATION OF ADJUSTED BOOK PROFIT UNDER THE

PROVISIONS OF SECTION 115JB(2)
By the Revenue

By the Applicant

Financial Year 2002-03 (A.Y.2003-04)

Book profit as per audited
accounts
Rs. 521 cr.
As reduced by :
(i) Aggregate book loss for
the last 12 years
- Rs.1755 cr.
Or
(ii) Aggregate unabsorbed
Dep. for the last
12 years as per the
books - Rs.3227 cr.

Book profit as per audited

accounts
Rs. 521 cr.
As reduced by :
(i) Aggregate book loss for
the last 12 years
- Rs.1755 cr.
Or
(ii) Aggregate unabsorbed
Dep.for the last
12 years as per the
books
- Rs.3227 cr.

Whichever is less

Whichever is less

Adjusted book profit

Rs.1755 cr.
(-) Rs.1234 cr.

Adjusted book profit

The adjusted book profit being

negative, no tax liability arises under
MAT provision for this year. However,
for the next F.Y., the applicant is
entitled to carry forward the following
amounts :

Rs.1755 cr.
(-)Rs.1234 cr.

However, for the subsequent year, the

carry forward business loss /
unabsorbed depreciation has been
computed as under :
Book profit as per
audited accounts
Less:unabsorbed dep.

(a)unabsorbed book loss= Rs.1234 cr.

(b)unabsorbed book dep.= Rs.3227 cr.

Rs. 521 cr.

Rs.3227 cr.

Balance unabsorbed dep.

Carry forward to the next
F.Y.
Rs.2706 cr.
Balance unabsorbed
book loss carried forward
to the Next F.Y.
Rs.1755 cr.
Financial Year 2003-04 (A.Y.2004-05)
Book profit as per audited

Book profit as per audited

accounts
As reduced by :
(i) Brought forward
unabsorbed business
dep. - Rs.3227 cr.
Or
(ii)unabsorbed
loss - Rs.1234 cr.
Whichever is less

Rs.1547 cr. accounts

As reduced by :
(i) Brought forward
unabsorbed business
dep. - Rs.2706 cr.
Or
(ii)unabsorbed
loss - Rs.1755 cr.
Rs.1234 cr. Whichever is less

Adjusted book profit

Rs. 313 cr.
Less: Profit attributed to
export turnover as
computed by the
applicant
Rs. 233.45 cr.
Balance adjusted book
profit subject to levy of
minimum Alternative
tax u/s 115JB
Rs.

Rs.1547 cr.

Rs.1755 cr.

Adjusted book profit as

computed by the
applicant
(-) Rs. 208 cr.
Since as per the applicants method of
calculation, the adjusted book profit is
negative, there can be no levy of
minimum alternate tax for the
F.Y.2003-04.

79.55 cr.

However, according to the applicant for

As per the above computation for the next F.Y., the following amounts are
purpose of 115JB(2) in respect of the carried forward in the books :
next F.Y., the applicant is entitled to
carry forward the following amounts :
(a) Book profit as per
audited accounts
Rs.1547 cr.
(a) Business dep.
Rs.3227 cr. Less : Brought forward
(b) Unabsorbed loss
Rs. nil
Unabsorbed dep.
Rs.2706 cr.
Balance unabsorbed dep.
carry forward to
F.Y.2004-05
Rs.1159 cr.
(b) Unabsorbed loss
carried forward to the
F.Y.2004-05

Rs.1755 cr.

Financial Year 2004-05 (A.Y.2005-06)

Estimated Book profit as
per the applicant
As reduced by :
(i) Brought forward
unabsorbed loss as
computer for earlier
year
- Rs. nil
Or

Estimated Book profit as

Rs.2250 cr. per the applicant
Rs.2250 cr.
As reduced by :
(i) unabsorbed business
dep.
- Rs.1159 cr.
Or
(ii)unabsorbed

(ii) Brought forward

business dep. as
computed for earlier
year
- Rs.3227 cr.
Whichever is less

loss
- Rs.1755 cr.
As computed by the Applicant for
Earlier F.Y.
Rs.

nil

Whichever is less

Rs.1159 cr.

Adjusted book profit on which the Adjusted book profit on which the MAT
applicant is required to pay Advance liability arises is Rs.1091 cr.
tax on account of MAT liability is
On such adjusted book profit according
Rs.2250 cr.
to the applicant, advance tax payable
On such adjusted book profit, total by
the
applicant
would
be
advance tax payable by the applicant Rs. 85.55 cr.
would amount to Rs.176.42 cr.
5.

The applicant in its rejoinder to the written submissions of the

Commissioner has stated that while it is true that there is a disagreement

between the applicant and the Income Tax Authority regarding the methodology
to be adopted for computing the taxable income for the purpose of section
115JB, the comments of the Commissioner that the method adopted by the
applicant is intended to either totally avoid or substantially reduce the MAT
liability is not correct. The Applicant has adopted a method, which in its opinion
represents the correct interpretation of Sec. 115JB. Section 115JB is selfcontained and in so far as the method of computation adopted by the applicant is
not at variance with the specific provision contained in the Statute, the same
cannot be rejected on the ground that it has no basis whatsoever. Neither the
Notes on clauses nor the Memorandum explaining the objects of the subject
provision indicate any particular method that should be followed in computing the
taxable income. Hence, the applicant is bound only to adopt a methodology,
which is based on the interpretation of the specific provision contained in the
Statute and not on any other basis. The applicant does not have any doubt as to

10

the comparison between the amount of loss brought forward & unabsorbed
depreciation and in reducing the lower of the two from the current years net profit
for ascertaining the book profit. The issue is only with reference to whether the
current years profit is to be adjusted against the loss brought forward or against
the unabsorbed depreciation in the books of accounts of the applicant. The
question for decision before the Honble Authority, it is submitted, is whether
Section 115JB imposes any restriction with regard to the discretion of an
assessee in the matter of computation of book profit, in the absence of any
specification therein as to the manner in which business loss or unabsorbed
Depreciation has to be adjusted. In the absence of any statutory prohibition as
regards the methodology adopted by the applicant, it cannot be termed as a
design to reduce the tax liability. Courts have consistently held that so long as
an assessee falls in line with the express statutory provisions, the transaction
cannot be treated as a design, merely on the ground that the methodology
results in a tax liability lower than what the Revenue seeks to levy. The
methodology adopted by the department is not based on any interpretation of the
relevant statutory provisions by the Honorable ITAT/ High Court/ Supreme Court.
It is only based on an illustrative example given in Circular No.495 dated
22.9.1987, which was issued with reference to section 115J while the taxable
income of the applicant is required to be computed under the provisions of
section 115JB.

11

6.

The main submissions of the applicant during the course of oral hearing

and subsequent written submissions dated 11.3.2006 received in the office of the
Authority on 16.3.2006 are summarized as under: (a) The applicant prepares its accounts in conformity with the Companies
Act.

It shows only the consolidated figure of loss (including

depreciation) in such accounts prepared.

No bifurcation of such

consolidated loss into book loss excluding depreciation and book

depreciation is made separately, there, being no such requirement as
per the companies Act.
(b) For purposes of compliance with the provisions of section 115JB of the
Income Tax Act, the applicant bifurcates such consolidated loss shown
in its accounts into book loss and book depreciation and claims the
lesser of these two against its current profit. Such bifurcation is done
only through a memorandum of adjusted statement prepared by the
applicant for computation of its tax liability alone. Such bifurcation is
not reflected in the annual accounts maintained under the Companies
Act and hence has relevance for income tax assessment only.
(c) Each assessment year is an independent unit and presentation of
accounts in one assessment year (for purposes of compliance with
section 115JB) will have no relevance to the presentation of accounts
for the same purpose of section 115JB in the subsequent assessment
year.

12

(d) The

carry

forward

of

its

consolidated

book

loss

(including

depreciation), being governed by the Companies Act, the reduction of

book loss or book depreciation, as the case may be, in its
memorandum of adjusted statement filed in terms of section 115JB are
to be ignored.

In the immediately following assessment year, the

computation of income tax liability under section 115JB must start with
net profit as per profit and loss account of that year which shows the
consolidated figure of book loss (including depreciation) brought
forward as per Companies Act. No reference to the adjustments done
in terms of section 115JB in the preceding assessment year or years
would, in the submission of the applicant, be required.
(e) Based on the above reasoning, the applicants contention is that, for
the purposes of quantification of income tax liability under section
115JB, although the reduction from current years profits to be made is
the lesser of book depreciation or book loss brought forward from
earlier years, yet for the purposes of quantification of carry forward of
unabsorbed

book

loss

and

book

depreciation to the next assessment year, the applicant company has

the option to reduce from the current years profit, either the book loss
or the book depreciation, irrespective of which one is lower. It can
exercise whichever option is beneficial to it.

13

7.

The Revenue, on the other hand, has vehemently argued that if there is

current profit as per the profit and loss account then the same would be reduced
by either the book loss or the book depreciation, whichever happens to be less.
Once such adjustment has been carried out, the unabsorbed book loss or the
book depreciation brought forward, whichever had been lesser, would stand
further reduced by such adjustment. The reduced amount alone would be
available for carry forward, to the subsequent year. The Department has relied
on CBDT Circular No.495 dated 22.9.87 to determine the correct method of set
off and carry forward of book loss and book depreciation from one year to the
next. The applicant has argued against its application on the ground that this
circular cannot be construed as a total statement of law on the subject, but is
only one of the interpretations. The CBDT circular is not binding on the applicant
and it is open to the applicant to establish that a different interpretation is
permissible under the law.
8.

The contention of the applicant that Companies Act does not contain any

provision for bifurcation of loss is not tenable. Proviso (b) to sub-section (1) of
section 205 of the Companies Act states as under:
Section 205(1) of Companies Act, 1956
Dividend to be paid only out of profits.
205 (1) xxx

xxx

xxx

xxx

xxx

Provided that (a)

xxx

14

(b)

if the company has incurred any loss in any previous financial year
or years, which falls or fall after the commencement of the
Companies (Amendment) Act, 1960, then, the amount of the loss or
an amount which is equal to the amount provided for depreciation
for that year or those years whichever is less, shall be set off
against the profits of the company for the year for which dividend is
proposed to be declared or paid or against the profits of the
company for any previous financial year or years, arrived at in both
cases after providing for depreciation in accordance with the
provisions of sub-section(2) or against both.

This clause is for the purpose of distribution of dividend by a company

which had earlier incurred losses, the company is required to reduce the current
years profit by the amount of loss or an amount which is equal to the amount
provided for depreciation for that year or those years whichever is less. It is this
very concept, which was incorporated in section 115J of the Act under
explanation, which states that for the purpose of section 115J, book profit
means the net profit as shown in the profit and loss account for the relevant
previous year and as reduced by clauses 1 to 4. Sub-clause 4 which is relevant
is reproduced hereunder:(iv)

the amount of the loss or the amount of depreciation which would be

required to be set off against the profit of the relevant previous year as if
the provisions of clause (b) of the first proviso to sub-section(1) of section
205 of the companies Act, 1956 (1 of 1956), are applicable.

15

Under section 205 of the Companies Act this methodology was prescribed
so that the dividend distribution did not erode capital of the concerned company
and the concept was incorporated in section 115J for the same purpose i.e. the
payment of MAT would not adversely affect the capital of the concerned
company under this deeming provision. The applicant has strongly relied on the
decision of Honorable Supreme Court in the case of Surana Steel Company (237
ITR 777) wherein it was held that the term loss in section 205 of the Companies
Act must be understood to mean loss after taking into account the depreciation.
Subsequent to this decision of the Honorable Apex Court the law was amended
by introducing section 115JA, which was in operation for the period 1st day of
April 1997 to 31st day of March 2001. From 1st day of April, 2001 onwards section
115JB is operative.

Under both these sections the relevant sub-clause 3

pertaining to the amount of loss brought forward or unabsorbed depreciation

includes an explanation, which states that the loss shown shall not include
depreciation.

For the sake of convenience sub-clause (iii) is reproduced

hereunder:
(iii) the amount of loss brought forward or unabsorbed depreciation,
whichever is less as per books of account.
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.

16

The explanation to sub-clause (iii) therefore leaves no room for doubt that
the expression loss brought forward does not include depreciation and the net
profit of the current year is to be reduced by the lesser of the two and the
provisions of sub-clause (iii) shall not apply if the amount of loss brought forward
are unabsorbed depreciation is reduced to nil. In other words for the purpose of
section 115JB, the brought forward loss and unabsorbed depreciation are
required to be depicted separately, independent of each other and after the
current years profit is reduced by the lesser of the two for the purpose of carry
forward to the next year, the closing balance of the immediate preceding year
would be the opening balance for the succeeding year. Since there is no direct
decision on this specific issue this is to be examined according to the general
principles of law and accountancy in the light of particular facts of this case. The
proposition that each year of accounting and assessment is an independent unit
is tempered by the requirement for consistency and regularity of treatment, which
is one of the primary foundations of law and accountancy. There can be several
parallel streams of accounting, each of them independently following its own
accounting and legal parameters prescribed by the respective statutes.

The

Companies Act prescribes rates of depreciation, which are lower than those
prescribed under the Income Tax Rules. For compliance with the Companies
Act, the concerned companies are required to claim depreciation at the rates
prescribed under the Companies Act. The closing written down value after such
depreciation claim would become the opening written down value for the
following year. The concerned company would not have any option in the matter.

17

The written down value would be reflected year after year in conformity with the
rates of depreciation claimed under the Companies Act. For all obligations under
the Companies Act, it is such rates of depreciation and the resultant written down
values, which would have to be taken cognizance. Under the Income Tax Act,
the depreciation schedule would reflect the depreciation claim allowable as per
the rates prescribed under the Income Tax Rules and the written down values
year after year would be accordingly determined.

Both these depreciation

schedules, under the Companies Act and under the Income Tax Act,
respectively, would run parallel, each undergoing change year after year as per
its own prescribed rules with reference to the rate of depreciation allowable under
the respective statues.
Computation of tax liability in terms of the provisions of section 115JB
would be an example of another parallel stream. Computation of income (as
affected by the rate of depreciation prescribed) would be quantified in a particular
manner under the Companies Act for statutory obligations under the Companies
Act, while there will be a parallel computation under the Income Tax Act (in terms
of the depreciation rates prescribed by the Income Tax Rules) and each
computations would follow its respective statute unaffected by the other. Section
115JB(3) gives statutory recognition to this general principle by stating that the
carry forward of depreciation and loss under the general provisions of the Act
(other than 115JB) will be governed by the relevant sections of the Act being
section 32 for depreciation and section 72 for carry forward and set off of loss,
etc. Thus the parallel streams of computation under the normal provisions of the

18

Act and 115JB computation of tax liability are kept separate and independent of
each other. Each stream, however, while being separate from the other parallel
stream, is based on a continuity of treatment carried out year after year. The
principles governing computation within a particular stream are strictly adhered to
in every successive year. On the same principle, 115JB computation must follow
the logic of internal consistency and regularity year after year, unaffected by the
parallel computations running under the Companies Act and the normal
provisions of the Income Tax Act.

Reduction made to book loss or book

depreciation in any particular year under the minimum alternate tax (MAT)
provisions must form a necessary basis for computation of MAT liability for the
subsequent year, irrespective of the treatment given under the Companies Act,
or, for that matter, under the normal provisions of the Income Tax Act. The
above interpretation is strongly supported by Circular No.495 dated September
22, 1987 para 36.5 of the Circular, which is apposite, is extracted below:
36.5

The following examples illustrate as to how the amended provisions

relating to the new section will be applied:

New Companies
Book profits for the purposes of the
Companies Act, 1956
(1)

Profit under the Income-tax Act

(2)

Year 1984
Rs.

Rs.

Loss excluding
Depreciation

..

3,00,000

Loss excluding
depreciation
..

Depreciation

..

1,00,000

Depreciation

Year 1985
Profit before

Profit before

19

..

80,000
4,00,000

Depreciation
..
Less depreciation as
Per books
Less deduction u/s.
205(2) for the year 1984

C.F.Business loss ..
1984

5,00,000
2,00,000
3,00,000

depreciation ..
5,00,000
Less depreciation.. 4,00,000
1,00,000
Less business loss
for 1984
..

1,00,000
2,00,000

Less unabsorbed
depreciation

3,00,000

80,000
20,000

20,000
Nil

C.F.unabsorbed
Depreciation 1985 3,80,000

(1)

(2)
Year 1986

Net loss as per books

Before depreciation (-)
Depreciation
..
Business loss to be
Carried forward (-)

10,00,000

10,00,000

Business loss (-)

Add depreciation

2,00,000

as per I.T.Rules(-)

4,00,000

10,00,000

Unabsorbed depreciation
To be carried forward (-) 10,00,000
Unabsorbed depreciation
To be carried forward (-)

2,00,000
Year 1987

Net profit
..
Book depreciation ..

10,00,000
2,00,000

Profit before depreciation 10,00,000

Less depreciation as ..
8,00,000
Per I.T. Rules

Less carried forward

Business loss for 1986
To the extent adjusted ..
Assessed income
Application of section 115J
Profit before depreciation
..
..
Less book depreciation
..
..

20

2,00,000
Nil
10,00,000
2,00,000
8,00,000

Less deduction under section 205(2)

..

..

Out of the amount whichever is less:

1984 : Business loss
1986 : Business loss
Total loss..

..

..
3,00,000
10,00,000
13,00,000

..

1986: depreciation
..
Assessible income 30% of Rs.6 lakhs, i.e. Rs.1.8 lakhs.
Amount to be carried forward as per sub-section (2) of
Section 115J:
1984 : Unabsorbed depreciation

..

2,00,000
6,00,000

..

2,00,000

3,80,000

1986 : Business loss

..
8,00,000
Unabsorbed depreciation
..
4,00,000
36.6 These amendments will come into force with effect from 1st April, 1988,
and will accordingly, apply in relation to the assessment year 1988-89 and
subsequent years.
[ Section 43 of the Finance Act]
The jurisdictional A.P. High court in the Suryalatha Spinning Mills case
(223 ITR 713) in the course of disposing of writ petitions filed against the
constitutional validity of section 115J, had occasion to discuss in detail this
Circular 495. One of the conclusions reached by the Court was that .. there
was no illegality in the example of calculations given in the Board Circular
No.495, dated September 22, 1987 .{see [1987] 168 ITR(St.)87}. The concept of
contemporanea expositio is well-established rule for interpreting a statute. The
meaning

of

the

Latin

expression

as

per

Blacks

Law

Dictionary

is

Contemporaneous exposition, or construction; a construction drawn from the

time when, and the circumstances under which, the subject-matter to be
construed, as a statute or custom, originated. In this regard the observations of

21

Justice P.N.Bhagwati of the Honble Supreme Court in the case of K.P.Varghese

v. ITO (131 ITR 597, 612) are relevant to the issue. It was held as under:
These two circulars of the CBDT are, as we shall presently point out,
binding on the tax department in administering or executing the provisions
enacted in sub-s (2), but quite apart from their binding character, they are clearly
in the nature of contemporanea expositio furnishing legitimate aid in the
construction of sub-s(2). The rule of construction by reference to contemporanea
expositio is a well established rule for interpreting a statute by reference to the
exposition it has received from contemporary authority, though it must give way
where the language of the statute is plain and unambiguous. This rule has been
succinctly and felicitously expressed in Crawford on Statutory Construction, 1940
Edn., where it is stated in paragraph 219 that administrative construction (i.e.
contemporaneous construction placed by administrative or executive officers
charged with executing a statute) generally should be clearly wrong before it is
overturned; such a construction, commonly referred to as practical construction,
although non controlling, is nevertheless entitled to considerable weight, it is
highly persuasive.
Honorable Supreme Court has re-iterated the above principle in the case
of Azadi Bachao Andolan [263 ITR 706-728] as under:In K.P.Varghese v. ITO [1981] 131 ITR 597 (SC), it was pointed out by
this court that not only are the circulars and instructions, issued by the Central
board of Direct Taxes in exercise of the power under section 119, binding on the
authorities administering the tax department, but they are also clearly in the

22

nature of contemporanea expositio furnishing legitimate aid to the construction of

the Act.
The rule of contemporanea expositio is that administrative construction
(i.e., contemporaneous construction placed by administrative or executive
officers charged with executing a statute) generally should be clearly wrong
before it is overturned; such a construction, commonly referred to as practical
construction, although non-controlling, is nevertheless entitled to considerable
weight, it is highly persuasive. (Crawford on Statutory Construction, 1940 edition,
as in supra note 130.
The validity of this principle was recognized in Baleshwar Bagarti v.
Bhagirathi Dass [1908] ILR 35 Cal 701, 713, where the Calcutta High Court
stated the rule in the following words:
It is a well-settled principle of interpretation that courts in construing a
statute will give much weight to the interpretation put upon it at the time of its
enactment and since, by those whose duty it has been to construe, execute and
apply it.
The statement of this rule has also been quoted with approval by this court
in Deshbandhu Gupta and Co. v. Delhi Stock Exchange Association Ltd. [1979] 4
SCC 565.
During the course of oral hearing, the learned counsel for the applicant
contended that Circular No. 495 having been issued under section 115 J would
not be applicable to the amended provisions as contained under section 115 JB.
It is not possible to up hold the contention for the simple reason that though

23

provisions for working out the book profit as contained in the explanation have
undergone little change, the basic provisions practically remain the same. In so
far as from the net profit of the relevant previous year what is required to be
reduced is only brought forward loss or unabsorbed depreciation, whichever is
less as per the books of accounts.
9.

The applicants contention that section 205(1) of the Companies Act read

with Supreme Court decision in Surana Steels case (237 ITR 777) makes it
mandatory that the term loss in section 205(1) of the Companies Act must be
understood to mean loss after taking into account depreciation, is relevant only
for the purpose of payment of dividend out of profits by a company. However, for
the purpose of computing book profit under section 115JB(2), sub-clause (iii) of
the explanation to second proviso specifically provides that, for the purposes of
the sub-clause the loss shall not include depreciation. A specific provision would
therefore, over rule the general law, a well-established rule of interpretation,
which needs no elaboration.

Therefore, for purposes of compliance to the

Companies Act, the term loss would be taken as after accounting for
depreciation, while, in a computation under section 115JB of the Income Tax Act,
the term loss would be taken as before accounting for depreciation. That the
computation of income under different Acts can, and perhaps should, be different
has already been dealt with. The important issue here is that a computation
under 115JB, as far as the figures of book loss or book depreciation brought
forward from earlier year or years are concerned, must start with the figures of
similar computation made under section 115JB in the immediately preceding

24

year. Starting from any other point, as attempted to by the applicant, would be
against the principles of consistency and regularity.

Section 115JB does

stipulate that computation under the section should start from accounts prepared
under the Companies Act for the relevant previous year, but that is only for the
purpose of working out net profit under sub-section (2).

Further given the

specific provisions of sub-clause (iii) of the explanation the net profit so arrived at
has to be reduced by book loss or book depreciation (which ever is less) of the
preceding years as per accounts prepared under the Companies Act and as
modified by reduction, if any, made under section 115JB for earlier year or years.
If the provisions of section 115JB treat book loss before depreciation and
depreciation claim itself as distinct, then the accounts prepared under the
Companies Act must be modified, wherever necessary, to comply with the
provisions of section 115JB, for computation of minimum alternate tax.
In this regard observations of Justice B.N.Kirpal of Delhi High Court
(as his lordship then was) in the case of NTPC v. Union of India and Others (192
ITR 187-188) are reproduced hereunder:
It was then contended that the petitioner has to maintain its accounts
according to the provisions of the electricity Act and it is not possible for it to
comply with the provisions of section 115J. We do not agree with this. Section
115J, as it stood in the year 1987-88, which is the only year applicable to the
petitioner, does not make it mandatory for the accounts to be maintained under
the provisions of the Companies Act. We see no difficulty in making adjustments

25

in accounts wherever necessary for the purpose of complying with the provisions
of section 115J.
In view of the foregoing discussion, it is not possible to up-hold the
contention of the applicant that presentation of accounts in one assessment year
under section 115JB will have no relevance to the presentation of accounts in the
immediate succeeding year for the same purpose under section 115JB.

It,

therefore, follows that the contention of the applicant that although the reduction
from current years profits to be made is the lesser of book depreciation or book
loss brought forward from earlier years, yet for the purposes of quantification of
carry forward of unabsorbed book loss and book depreciation to the next
assessment year, the applicant company has the option to reduce from the
current years profit, either the book loss or the book depreciation, irrespective of
which one is lower is without any basis and cannot be approved.
By referring to the decision of the jurisdictional High Court in the case of
Suryalatha Spinning Mills quoted supra it has been contended by the Counsel for
the applicant that calculation under section 115JB does not amount to a method
of accounting and accordingly leave the applicant free to start the computation
from the books of each previous year without reference to the manner in which
the book profit was calculated in the immediate preceding year. We are unable
to agree with the conclusion drawn since the observations of the Andhra Pradesh
High Court, referred to by the applicant, only confirmed the position that the
determination of taxable income under the provisions of the Act (other than
section 115J) and the right to carry forward and set off available under section 32

26

and section 72 to 74A remain unaffected by computation made under section

115J. For the sake of facility the relevant portion of the decision (quoted by the
applicant) is reproduced here under:
Sub-section (2), with which we are concerned, says that the provisions of
sub-section (1) shall not affect the determination of the amounts in relation to the
relevant previous year to be carried forward to the subsequent year or years
under :( a) sub-section (2) of section 32; or (b) sub-section (3) of section 32A; or
(c ) clause (ii) of sub-section (1) of section 72; or (d) section 73; or (e) section 74;
or (f) sub-section (3) of section 74A; or (g) sub-section (3) of section 80J)
Sub-section (2) is only a saving provision. It provides that determination
of the amounts in relation to the relevant previous year to be carried forward to
the subsequent year or years under the provisions, enumerated above, will have
to be made unaffected by the provisions in sub-section(1) of section 115J.
It is argued that having regard to sub-section (1), determination of the
amounts to be carried forward of losses, etc., referred to above, three
propositions are possible, viz.:
(i) Once the income is determined under sub-section (1) in an assessment
year, from that year unabsorbed losses and unadjusted allowances, etc.,
mentioned above, cannot be carried forward any more because by operation of
sub-section (1) of section 115J, a new scheme has come into effect which puts
an end to the carrying forward of losses, etc.;
(ii) On the determination of the taxable income, under the relevant
provisions of the Act, whatever amounts remain to be carried forward as per

27

regular computation, either by way of unabsorbed losses or unadjusted

allowances, etc., the same be carried forward to the next year ignoring the fact
that a notional income is made taxable under sub-section (1);
(iii)

The taxable income arrived at under sub-section (1) of section 115J

should be deemed as available for purposes of setting of unabsorbed losses or

unadjusted allowances, etc., in that assessment year but postponed to the next
year without allowing the actual adjustment.
In our considered view sub-section (2) gives statutory recognition to the
proposition (ii), and gives no scope to entertain propositions (i) and (iii).
The learned counsel for the applicant has also pleaded that section 115JB
has introduced a fiction of treating the book profit as total income in the case of
specified companies. The fiction is to be construed strictly and nothing can be
read into the statutory provision to extend the scope of the statutory fiction. {CIT
Vs. Mother India Refrigeration Industries Pvt. Ltd. (155 ITR 711)[SC] and CIT Vs.
C.P.Sarathy Mudaliar (83 ITR 170-173) [SC]}. Following the principle, as we do,
we would add that where the statutory provision is silent regarding carry forward
of business loss and unabsorbed depreciation after reduction against current
years profit, the carry forward would be according to the general principles of law
and accountancy as applicable for the purpose of carry forward of
loss/unabsorbed depreciation under other Acts. It is not open to each taxpayer to opt for
inconsistent method of accounting.Suffice it to say that no accounting is possible without
following some method of accounting which is consistent and regular from year to year.
Therefore, both on the interpretation of section 115JB as well

28

as on the

principal of

consistency of method of accounting, the claim of the applicant is untenable.

In the light of the above discussion we rule on the questions referred to

above as under:
(a)

No. The applicant does not have the option to reduce the current
years profit by the loss brought forward or unabsorbed depreciation
(for the purpose of carry forward under section 115JB), in its accounts,
in a manner different from the manner adopted for determination of
book profit under Section 115JB.

(b)

No. The applicant does not have the discretion to reduce the current
years profit either by the loss brought forward or unabsorbed
depreciation. The lesser of the two is required to be reduced from the
current years income. After making the reduction in one year, the
applicant cannot adopt a different method in the subsequent years.
The applicant cannot reduce the current years profit partly by the
business loss brought forward and partly by unabsorbed depreciation.

(c)

No. The applicant having disclosed the aggregate loss comprising of

loss brought forward and unabsorbed depreciation as a consolidated
figure in its Profit & Loss account, for the purpose of calculating the
book profit under Section 115JB is required to bifurcate such
consolidated

loss

into

loss

brought

forward

and

unabsorbed

depreciation but cannot avail of the benefit of reduction envisaged

under Sub-section (2) of Section 115JB in a manner different from the

29

one prescribed under the Act, so as to be more beneficial to the

applicant.
(d)

No. It is not open to the applicant to reduce the current years profit by
the loss brought forward or unabsorbed depreciation in a manner more
beneficial to the applicant and such adjustment cannot be changed
from year to year.

(e)

No. The applicant cannot change the method of reducing the current
years profit by the loss brought forward or unabsorbed depreciation
from year to year. This would amount to change in the method of
accounting (for the purposes of section 115JB), which is not
permissible.

(f)

The method adopted by the applicant for calculating book profit for the
Assessment Years 2004-05 and 2005-06 is not in accordance with
section 115JB and is, therefore, incorrect. The method adopted by the
Revenue for the aforesaid Assessment Years is the correct method.

Pronounced by the Authority on this 19th day of July 2006.

Sd/(JUSTICE S.S.M. QUADRI)
CHAIRMAN

Sd/(A.S.NARANG)
MEMBER

F.No.AAR/652/2006
(A)

Date:

This copy is certified to be a true copy of the advance ruling and is sent to:
1.
The applicant
2.
The Commissioner of Income-tax-I,Vishakhapatnam.
3.
The Joint Secretary (FT&TR-I), M/Finance, CBDT, North Block, New
Delhi

30

4.
5.
(B)

The Joint Secretary (FT&TR-II), M/Finance, CBDT, North Block, New

Delhi
Guard file.

In view of the provisions contained in Section 245S of the Act, this ruling
should not be given for publication without obtaining prior permission of
the Authority.

(Shyama S.Bansia)
Addl.Commissioner of Income-tax (AAR-IT)

31