MAT Computation: "Relevant Date" for Brought Forward Loss u/s 115JB is 1st April; Loss Wiped Out by Capital Reduction During the Year Still Available for Set-off

MAT Computation: “Relevant Date” for Brought Forward Loss u/s 115JB is 1st April; Loss Wiped Out by Capital Reduction During the Year Still Available for Set-off

ISSUE

Whether the “relevant date” for determining the quantum of brought forward loss or unabsorbed depreciation for reduction from Book Profit under Explanation 1(iii) to Section 115JB(2) is the beginning of the financial year (1st April) or the end of the financial year (31st March), especially when such losses were extinguished by a reduction of share capital during the relevant previous year.

FACTS

The Claim: The assessee, a private limited company, filed its return for AY 2005-06 declaring Nil income under normal provisions and Nil liability under Section 115JB (MAT).
The Basis: The Nil MAT liability was computed by reducing the brought forward business loss/unabsorbed depreciation as per books of account from the current year’s profit.
The Event: During the relevant financial year (FY 2004-05), the company undertook a reduction of share capital amounting to approximately Rs. 22.05 Crores. This amount was used to wipe out/absorb the accumulated losses in the books.
AO’s Action: The Assessing Officer (AO) took the view that for computing Book Profit for AY 2005-06, the “relevant date” to check the existence of losses is 31-03-2005 (year-end). Since the losses were wiped out by the capital reduction during the year, the AO held that there was no “unabsorbed loss” remaining at the end of the year to be set off, and thus added the entire book profit to tax.

HELD

Meaning of “Brought Forward”: The Tribunal held that the term “amount of loss brought forward” specifically refers to the loss brought from the preceding year into the current year.
Relevant Date: The crystallization of the “brought forward” figure happens on the 1st day of the previous year (i.e., 01-04-2004 for AY 2005-06), which corresponds to the closing balance of the immediately preceding year (31-03-2004).
Impact of Capital Reduction: Any accounting adjustment (like capital reduction) made during the course of the financial year to wipe out losses affects the balance sheet of the current year-end but does not erase the fact that losses were indeed “brought forward” at the start of the year.
Conclusion: The assessee is entitled to reduce the lower of loss/depreciation as it stood on the opening date of the year, irrespective of the subsequent write-off during the year.
Verdict: The AO was directed to accept the loss figures as of 31-03-2004 (1-4-2004). [In Favour of Assessee]

KEY TAKEAWAYS

Timing is Everything: For Section 115JB, the deduction for losses is static based on the opening balance. If you write off losses against Share Premium or Capital Reduction during the year, you still get the MAT benefit for that specific year because the losses existed on Day 1.
Solvency vs. Tax: Companies often reduce capital to clean up their balance sheet (financial solvency). This judgment ensures that this financial restructuring does not immediately penalize them with a heavy MAT liability in the very same year.
Future Years: Note that for the subsequent assessment year (e.g., AY 2006-07), the opening balance will be Nil (due to the write-off), so the MAT benefit will cease from the next year onwards.

IN THE ITAT CHENNAI BENCH ‘B’

Bay Forge (P.) Ltd.

ACIT^*

GEORGE GEORGE K, Vice President
and S.R. Raghunatha, Accountant Member

IT APPEAL No. 2329 (Chny) OF 2024
[Assessment year 2005-06]

DECEMBER 10, 2025

R. Sivaraman, Adv. for the Appellant. Shiva Srinivas, C.I.T. for the Respondent.

ORDER

S.R. Raghunatha, Accountant Member.- This appeal filed by the assessee is directed against the order passed by the learned Commissioner of Income Tax, Appeal, ADDL/JCIT(A) -4, Kolkata, (in short ‘ld.CIT(A)’) dated 12.07.2014 and pertains to assessment year 200506 against the order of the AO passed u/s.143(3) r.w.s.147 of the Income Tax Act, 1961 (in short ‘the Act’) dated 29.12.2011.

2. The assessee has raised the following grounds of appeal:

The order of the Ld. CIT (Appeals) dated 12.07.2024 for the impugned AY 2005-06 is against the provisions of law and contrary to the facts of the case.

The learned CIT(A), National Faceless Appeal Centre, The Assessing Officer ought to have appreciated that the re-assessment proceedings initiated u/s.147 of the Act in the case of the Appellant for the impugned AY 2005-06 is bad in law.

The learned CIT(A), failed to appreciate that as per the provisions of Section 147 of the Act, re-assessment proceeding can be initiated beyond four years only when there is a failure on the part of the Appellant to fully and truly disclose any material which aspect is clearly absent in the facts and circumstances of the Appellant’s case for the impugned AY 2005-06.

The learned CIT(A), ought to have appreciate the fact that the AO erred in calculating the carry forward depreciation and carry forward business losses without a depreciation as per books of accounts in a manner totally different than under the manner required to be calculated under the Income Tax Act.

The learned CIT(A), ought to have appreciated the fact that the AO further erred in determining the carry forward depreciation and carry forward business losses without depreciation as per books of accounts for the subsequent assessment years.

For the aforesaid grounds and for other grounds to be raised at the time of hearing, the order of CIT (Appeals) may be set aside and justice be rendered.

3. The brief facts of the case emanating from records are that the assessee is a private limited company filed its return of income for the A.Y.2005-06 declaring Nil income after adjusting the carry forward business loss on 13.03.2006. The liability under the provisions of MAT was also Nil in view of the amount of loss brought forward or unabsorbed depreciation as per Section 115JB.

4. Subsequently, a notice was issued u/s.147 of the Act and the assessment was completed vide order dated 29.12.2011. Subsequently the assessee preferred an appeal before the ld.CIT(A), NFAC and ld.CIT(A) vide order dated 12.07.2024 has confirmed the order of the Assessing officer.

5. Aggrieved by the order of the ld.CIT(A), the assessee is in appeal before us.

6. The ld.AR for the assessee submitted that though even under the impugned order, the liability under the provisions of Section 115JB is Nil, the impugned order is under this appeal for the following three issues:

–

What is the relevant date i.e.31.03.2004 or 31.03.2005 (The Assessing Officer (“AO”) has considered 31.03.2005) as the relevant date for the purpose of determining the amount of loss brought forward or unabsorbed depreciation under the provision of Section 115JB.

–

Whether set off the accumulated losses against share capital (Rs.22.05 Crores) has to be reduced while working out the amount of loss brought forward or unabsorbed depreciation under the provision of Section 115JB.

–

Whether the amount of loss brought forward or unabsorbed depreciation under the provision of Section 115JB has to be determined year wise separately or in a composite manner as on the date of beginning of the financial year.

7. The ld.AR submitted that the AO has considered the ‘relevant date’ for the purpose of determining the amount of loss brought forward or unabsorbed depreciation u/s.115JB of the Act as 31.03.2005 for the AY 2005-06. This is erroneous and contrary to the provisions of Section 115JB of the Act. The relevant date is 31.03.2004.

8. The ld.AR argued that with regard to set off the accumulated losses against share capital has to be reduced while working out the amount of loss brought forward or unabsorbed depreciation under the provision of Section 115JB of the Act.

9. The AO considered the amount of profit for the F.Y.2003-04 as Rs.22.16 Crores, which includes a sum of Rs.22.05 Crores, which is reduction in share capital. This finding of the AO is contrary to the provisions of Section 115JB of the Act, as what is required to be considered as the amount of loss brought forward or unabsorbed depreciation as per books of accounts and not in the Profit and Loss Account and Balance Sheet.

10. The above issue has been decided very clearly in the decision of the Chennai Tribunal in the matter of Prithvi Softech Ltd. v. Commissioner of Income-tax Officer [IT Appeal No. 797 (Mds) of 2010] for A.Y.2005-06 dated 28.07.2011. In this case the issue was exactly the same as current appeal and the Tribunal has opined that the amount of capital reduction has to be excluded while working out the amount of loss brought forward or unabsorbed depreciation u/s.115JB of the Act.

11. He further submitted that with regard to whether the amount of loss brought forward or unabsorbed depreciation under the provision of Section 115JB of the Act has to be determined year wise separately or in a composite manner as on the date of beginning of the financial year. The AO has determined the amount of loss brought forward or unabsorbed depreciation under the provision of Section 115JB of the Act as under:

Year Ending	Depreciation	Business Loss	Business Loss without Depreciation	Adjustment	Remarks	cumulative business loss as per books
31.03.1997	(2,848,288)	(1,78,66,281)	(15,017,993)			(1,78,66,281)
	(2,848,288)	(1,78,66,281)	(15,017,993)
31.03.1998	(14,872,413)	(4,32,23,730)	(28,351,317)	5,912,166	Prior period income	(5,51,77,845)
	(17,720,701)	(6,10,90,011)	(43,369,310)
31.03.1999	(16,277,203)	(7,70,20,544)	(60,743,341)			(13,21,98,389)
	(33,997,904)	(13,81,10,555)	(104,112,651)
31.03.2000	(16,998,689)	(9,63,77,099)	(79,378,410)			(22,85,75,488)
	(50,996,593)	(23,44,87,654)	(183,491,061)
31.03.2001	(17,025,740)	(9,56,38,899)	(78,613,159)			(32,42,14,387)
	(68,022,333)	(33,01,26,553)	(262,104,220)
31.03.2002	17,227,557	2,23,50,425		2,100,599	Reversal of prov. for doubtful debts	(29,97,03,363)
	(85,299,890)	(30,77,76,128)	(262,104,220)
31.03.2003	(17,820,063)	(5,11,35,360)	(33,315,297)			(35,08,36,723)
	(103,119,953)	(358,911,488)	(295,419,517)
31.03.2004	(18,527,375)	(17,415,876)	(11,11,499)	22,05,00,000	Reduction in share capital	(14,77,54,599)
	(121,647,328)	(376,327,364)	(294,908,018)
31.03.2005	(27,040,231)	23,154,375	50,194,896			(32,46,00,224)
	(148,687,559)	(353,172,989)	(244,113,412)

12. From the above working, the ld.AR pointed out that the AO determined the amount of loss brought forward or unabsorbed depreciation u/s.115JB of the Act on year to year basis instead of in a composite manner. Such a finding by the AO is completely contrary to the provisions of Section 115JB of the Act in this regard. In support of his arguments, the ld.AR relied on the decision of Amline Textiles (P.) Ltd. v. ITO, Ward 3(1)-1, Mumbai [2009] 27 SOT 152 (Mumbai) dated 04.11.2008, which is squarely on the impugned issue in the present appeal.

13. Further, the ld.AR submitted that the AO relied upon the decisions of Fab trade and Kongarar Textiles. They were u/s.115J of the Act and the language of Section 115J is completely different than Section 115JB, with which this appeal is for. In fact, the clear change in language between these 2 sections and the simple and straight language of Section 115JB compared to Section 115J is itself an indication that the working u/s.115JB of the Act has to be done is a composite and consolidated manner. As such, the finding of the AO in this regard is unsustainable.

14. Further, the ld.AR submitted that the AO has considered the ‘relevant date’ for the purpose of determining the amount of loss brought forward or unabsorbed depreciation u/s.115JB of the Act as 31.03.2005 for the A.Y.2005-06. This is erroneous and contrary to the provisions of Section 115JB of the Act. The relevant date is 31.03.2004. In the similar set of facts the issue has been decided in favour of the assessee by the Hon’ble Delhi High Court in the case of Commissioner of Income-tax-III, New Delhi v. Sumi Motherson Innovative Engg. Ltd. [2010] 8 taxmann.com 46/[2011] 243 CTR 442/336 ITR 321/[2010] 195 Taxman 353 (Delhi), which states as follows:

“The assessee-company was engaged in the business of manufacture and sale of injection moulded plastic parts, stamping parts/moulds and job work. For the relevant assessment year, it filed its return of income declaring ‘NIL’ taxable income. The return was also accompanied by a report in Form No. 29B certifying the book profits to be ‘NIL’ in terms of Minimum Alternate Tax (MAT) provisions of section 115JB.

The Assessing Officer noticed that while computing book profits under section 115JB, the assessee had claimed a deduction of brought forward losses from the net profits as adjusted, though at the close of the relevant financial year, i.e., 31-03-2002, there were no accumulated losses as same were reduced to ‘NIL’ due to the reduction of share capital. The assessee, relying upon clause (iii) of the Explanation I to section 115JB(2), contended that even if during the financial year, those losses were eliminated because of the reduction in the share capital, that was of no consequence as the accumulated losses as on 31-3-2001 were to be taken into consideration.

The Assessing Officer rejected the assessee’s contention holding that relevant date would be 31-3-2002, as the final accounts of the said financial year had to prepared as on 31-3-2002 and on that date there were no losses available to the assessee to set off. On appeal, the Tribunal accepted the assessee’s contention holding that the expression ‘losses brought forward’ would mean the losses which existed as on the last date of the previous financial year and brought forward in the current financial year.

We have considered the respective submissions. The AO has given his own rationale in choosing last date of the financial year, which is the subject matter of assessment for the purpose of ascertaining the amount of unabsorbed losses brought forward. On the other hand, the order of the Tribunal provides its own justification for adopting the last day of the preceding year /first day of the current financial year. Both the rationale appear to be convincing. In such circumstances, the answer to the question would depend upon the language of the provision, as that depicts the intention of the legislature. As pointed out above, decision in this respect must rest upon the provisions of the Explanation below Section 115JB(iii) of the Act. This explanation categorically and unhesitatingly uses the term ‘loss brought forward’. The meaning that is to be assigned to this term would be naturally, the loss on the last date of the immediately preceding year, which is to be brought forward to the financial year in question. Clause (iii) provides for the amount of loss brought forward. What happens during the course of the year is not relevant, as under the scheme of the aforesaid provision no such contingency is taken note of. In the instant case, during the year loss is wiped out and therefore, this controversy has arisen. What would happen if the figure of loss increases during the year? In that eventuality, the Department is not going to take into consideration the increased loss during the year, but the loss figure which was in the previous year and brought forward. It is for this reason also, we are convinced that in a case like this Rule of Literal Interpretation of the provision, which is a well recognized Rule of interpretation needs to be adopted.

16. It is a common saying that the intention of legislature is to be judged from the language used in the legislation. If the language is plain and unambiguous, effect is to be given without going behind the wisdom of the legislature and also regardless of the result. It is also a cardinal principle of interpretation of fiscal statutes that they should be construed strictly – (see CIT v. Kasturi & Sons Ltd. [1999] 237 ITR 24 1 (SC). So long as the provision is free from ambiguity, there is no need to draw an analogy (see Rajasthan State Electricity Board v. Dy. CIT [1993] 200 ITR 434 (Raj.). The legal position is beautifully summed up by the Supreme Court in the case of CC&CE v. Hongo India (P.) Ltd. [2009] 5 SCC 791 in the following words:

“2. At the cost of some repetition, we may notice that the provisions of Sections 23 and 24 of the Act have been enacted by the Legislature with certain objects in mind. The intention of the Legislature is an important factor in relation to interpretation of statutes. The statute law and the case law go side by side and quite often the relationship between them is supplementary. In other words, interpretation is guided by the spirit of the enactment.

Interpretation can be literal or functional. Literal interpretation would not look beyond litera gegis, while functional interpretation may make some deviation to the letter of the law. Unless, the law is logically defective and suffers from conceptual and inherent ambiguity, it should be given its literal meaning. Where the law suffers from ambiguity, it is said interpretation must depend upon the text and context. They are the basis of the interpretation. One may well say that if the text is the texture, context is what gives it colour. Neither can be ignored. Both are important. That interpretation is best which makes the textual interpretation match the context.”

17. The upshot of the aforesaid discussion would be to answer the question by holding that the decision of the Tribunal is correct in law. Thus, we dismiss this appeal as devoid of any merit.”

15. In view of the above facts and the legal position, the Ld.AR prayed for setting aside the order of the ld.CIT(A) and allow the Appeal of the assessee. Per contra the ld.DR relied on the orders of the AO and ld.CIT(A).

16. We have heard the rival submissions perused the material available on records and gone through the orders of the authorities along with the case laws relied on the parties. The assessee is a private limited company filed its return of income for the A.Y.2005-06 declaring Nil income after adjusting the carry forward business loss on 13.03.2006. The liability under the provisions of MAT was also Nil in view of the amount of loss brought forward or unabsorbed depreciation as per Section 115JB. Later the notice was issued u/s.147 of the Act and the assessment was completed vide order dated 29.12.2011. The AO considered ‘relevant date’ for the purpose of determining the amount of loss brought forward or unabsorbed depreciation u/s.115JB of the Act as 31.03.2005 for the A.Y.2005-06. Subsequently the assessee preferred an appeal before the ld.CIT(A), NFAC and ld.CIT(A) vide order dated 12.07.2024 has confirmed the order of the Assessing officer.

17. We note that the assessee had a reduction of share capital to the tune of Rs.22.05 Crores during the relevant assessment year by exercising absorption of the losses as per books. Now the only issue to be adjudicated is whether the adjustment of reduction of share capital should be adjusted out of loss as on 01.04.2004 or as on 31.03.2005. The assessee’s contention holding that the expression ‘losses brought forward’ would mean the losses which existed as on the last date of the previous financial year and brought forward in the current financial year. The provisions of the Explanation below Section 115JB(iii) of the Act. This explanation categorically and unhesitatingly uses the term ‘loss brought forward’. The meaning that is to be assigned to this term would be the loss on the last date of the immediately preceding year, which is to be brought forward to the financial year in question. Clause (iii) provides for the amount of loss brought forward.

18. The identical issue in the similar set of facts has already been decided by the Hon’ble Delhi High Court in the case of Sumi Motherson Innovative Engg. Ltd. (supra) stating that the ‘relevant date’ for the purpose of computing the book profits as per explanation 1 of u/s.115JB of the Act is beginning of the financial year. The relevant para is extracted as below:

19. In the present facts and circumstances of the case and respectfully following the decision of the Hon’ble Delhi High Court (supra), we are of the considered view that the relevant date for determining brought-forward loss u/S.115JB of the Act for AY 2005-06 is 01.04.2004 (i.e., losses as on 31.03.2004) and not 31.03.2005 as taken by the AO. Therefore, we set aside the order of the ld.CIT(A) and allow the grounds of appeal raised by the assessee.

20. In the result, the appeal of the assessee is allowed.