Kirloskar Ferrous Industries Ltd., Pune V. Addl.CIT,Range-9, Pune

ITA 519/PUN/2009

• Counselvise Citation: 51924514 RSA 2009
• Duration Of Justice: 2 year(s) 7 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2005-2006
• Appeal Filed On: 30-04-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MITALI MADHUSMITA
• Keywords: Depreciation; Business expenditure; Advance ruling; Unabsorbed depreciation
• Section: 143(3); 115JB

Judgement Text

.IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI I C SUDHIR, JUDICIAL MEMBER AND SHRI G.S. PANNU, ACCOUNTANT MEMBER ITA NO 519/PN/09 (ASSTT. YEAR: 2005-06) KIRLOSKAR FERROUS INDUSTRIES LTD. .. APPELLANT LAXMANRAO KIRLOSKAR ROAD, KHADKI, PUNE PAN AAACK7297E VS. ADDL. COMMISSIONER OF INCOME-TAX, .. R ESPONDENT R-9, PUNE APPELLANT BY : SHRI C.H. NANIWADEKAR RESPONDENT BY : SMT MITALI MADHUSMITA, CIT(DR) ORDER PER G.S.PANNU, A.M: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDE R OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-III, PUNE DATED 16 .1.2009 WHICH, IN TURN, HAS ARISEN FROM THE ORDER DATED 11.12.2007 PASSED BY T HE ASSESSING OFFICER PASSED UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 (IN SHORT THE ACT) FOR THE ASSESSMENT YEAR 2005-06. 2. THE ASSESSEE COMPANY IS ENGAGED IN MANUFACTURING OF PI G IRON AND GREY IRON CASTINGS. GROUND NO. 1 OF THE APPEAL RELATES TO DI SALLOWANCE OF FOLLOWING EXPENSES: 1/10 TH OUT OF VEHICLE EXPENSES RS 48,414/- OUT OF TELEPHONE EXPENSES RS 1,00,000/- 3. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER DISALLOWED 10% OF THE EXPENSES DEBITED UNDER THE HEAD VEHICLE EXPENSES AFTER OBSERVING THAT NO LOG BOOK OR ANY OTHER SUCH RECORD HAS BEEN MAINTAINED BY THE 2 ASSESSEE WHICH COULD HELP IN VERIFYING THAT THE TOTAL EXP ENDITURE DEBITED UNDER THIS HEAD HAS BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR T HE PURPOSE OF BUSINESS. SIMILARLY, THE ASSESSING OFFICER MADE AN AD HOC DISALLOWAN CE OF RS 2,00,000/- AS NON-BUSINESS EXPENDITURE OUT OF TELEPHONE EXPENSES OF RS 16,18,529/- AFTER OBSERVING THAT NO SEPARATE TELEPHONE CALL REGISTER OR A NY OTHER SUCH RECORD HAS BEEN MAINTAINED BY THE ASSESSEE. 4. IN APPEAL, THE COMMISSIONER OF INCOME-TAX (APPEALS) HELD AS UNDER: THE SUBMISSION HAS BEEN CONSIDERED AND IS FOUND TO BE PARTLY ACCEPTABLE. SO FAR AS DISALLOWANCES OUT OF VEHICLE EXPENSES AND TELEPHONE EXPENSES ARE CONCERNED, I FIND IT DIFFICULT TO FIND FAULT WITH THE ACTION OF THE AO B ECAUSE CONSIDERING THE NATURE OF THESE FACILITIES, THEIR USE FOR ON BUSINESS PURPOSES CANN OT BE RULED OUT AND THEREFORE, HIS ACTION OF MAKING PART DISALLOWANCES UNDER THESE HEADS IS H ELD TO BE JUSTIFIED. HOWEVER, THE DISALLOWANCES OF RS 2 LAKHS OUT OF TELEPHONE EXPENS ES OF RS 16,18,529/- APPEARS TO BE ON A HIGHER SIDE AND, THEREFORE, THE SAME IS REDUCE D AND RESTRICTED TO RS 1 LAKH ONLY. BEING AGGRIEVED WITH THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS), THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. 5. AFTER HEARING BOTH THE PARTIES, WE FIND THAT IDEN TICAL ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY PUNE BENCH OF THE T RIBUNAL IN THE ASSESSEES CASE FOR THE ASSESSMENT YEAR 2002-03 VIDE ORDER DA TED 30.6.2009 IN ITA NO 315/PN/07 WHEREIN IT HAS BEEN HELD THAT NO SU CH DISALLOWANCE IS PERMISSIBLE MERELY ON AN ESTIMATE BASIS. WE ALSO FIND THA T THE HONBLE BOMBAY HIGH COURT IN THE ASSESSEES CASE IN ITA NO 622 OF 2010 D ATED 04.07.2011 HAS HELD THAT THE ASSESSEE BEING A LIMITED COMPANY, NO SUCH AD HOC DISALLOWANCE CAN BE MADE. RESPECTFULLY FOLLOWING THE JUDGMENT OF TH E HONBLE JURISDICTIONAL HIGH COURT IN THE ASSESSEES OWN CASE, WE SET ASIDE THE ORD ERS OF THE AUTHORITIES BELOW AND DIRECT THE ASSESSING OFFICER TO DELETE THE IMPU GNED DISALLOWANCES. 6. GROUND NO. 2 OF THE APPEAL READS AS FOLLOWS: THE LD CIT (A) ERRED ON FACTS AND IN LAW IN UPHOLDI NG THE DISALLOWANCE OF PRIOR PERIOD EXPENSES OF RS 13,10,696/- ON THE GROUND THAT THE L IABILITY OF PAST YEARS CANNOT BE TAKEN INTO ACCOUNT FOR COMPUTING THE INCOME OF SUBSEQUEN T YEARS. HE FAILED TO APPRECIATE THAT THE BILLS FOR THESE EXPENSES HAVE BEEN RECEIVED DUR ING THE YEAR AND THE LIABILITY ACCRUED DURING THE YEAR UNDER THE ACCOUNTING SYSTEM FOLLOWE D BY THE COMPANY. 3 7. THE RELEVANT FACTS ARE THAT ON PERUSAL OF THE AUDI T REPORT, THE ASSESSING OFFICER NOTICED THAT EXPENSES OF RS 13,10,698/- PERTAI NING TO EARLIER YEARS WERE DEBITED IN THE PROFIT & LOSS ACCOUNT OF THE YEAR UNDER CONSIDERATION. AFTER OBSERVING THAT THE ASSESSEE FAILED TO ESTABLISH THAT THESE EXPENSES WERE CRYSTALISED DURING THE RELEVANT YEAR, THE ASSESSING OFFICE R DISALLOWED THE PRIOR PERIOD EXPENSES OF RS 1,10,698/-. IN APPEAL BEFORE T HE COMMISSIONER OF INCOME- TAX (APPEALS), THE ASSESSEE FURNISHED RELEVANT DETAILS O F EXPENSES AND CONTENDED THAT IN RESPECT OF ALL THE EXPENSES, THE BILL S WERE RECEIVED AND SETTLED IN THE YEAR UNDER APPEAL AND AS SUCH, THE LIABILITY PERTAINED TO THE CURRENT YEAR ONLY. RELIANCE WAS PLACED ON THE DECISION OF THE PUNE BE NCH OF THE TRIBUNAL IN THE CASE OF KIRLOSKAR PNEUMATICS CO. LTD. V. DCIT IN ITA NO 6/PN/07 DATED 10.8.2007 IN SUPPORT OF THE ASSESSEES STAND. 8. THE COMMISSIONER OF INCOME-TAX (APPEALS) AFFIRMED TH E DECISION OF THE ASSESSING OFFICER FOR THE REASON THAT THE ASSESSEE WAS NOT A BLE TO SUBSTANTIATE ITS CLAIM WITH ANY COGENT MATERIAL OR EVIDENCE. AGAINST THIS ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS), THE ASSESSEE IS IN FUR THER APPEAL BEFORE US. 9. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. WE FIND THAT THIS ISSUE STANDS CONCLUDED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN TH E ASSESSEES OWN CASE (SUPRA), WHEREIN THE HONBLE HIGH COURT HELD AS UNDER : 3. AS REGARDS THE QUESTION NOS II AND III ARE CONC ERNED, THE TRIBUNAL RELYING UPON ITS DECISION IN TH CASE OF KIRLOSKAR PNEUMATIC CO. IN I TA NO 6/PN/07 FOR THE AY 2003-04 HELD THAT EVEN IF THE EXPENDITURE IS INCURRED IN THE YEA R BUT THE DEMAND IS RAISED AND ACCEPTED IN THE SUBSEQUENT YEAR, THEN THE EXPENDITURE WOULD BE ALLOWABLE IN THE SUBSEQUENT YEAR. WE SEE NO INFIRMITY IN THE ABOVE ORDER PASSED BY IT AT. ACCORDINGLY, APPEAL IS DISMISSED. RESPECTFULLY FOLLOWING THE AFORESAID JUDGMENT OF THE H ONBLE JURISDICTIONAL HIGH COURT IN THE ASSESSEES OWN CASE, WE SET ASIDE THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) AND THE ASSESSING OFFICER IS DIRECTED T O DELETE THE DISALLOWANCE MADE ON THIS COUNT. THIS GROUND OF APPEAL I S THUS ALLOWED. 4 10. THE LAST GROUND PERTAINS TO THE DISALLOWANCE OF ME THOD OF ADJUSTMENT OF CARRIED FORWARD BOOK LOSSES AND DEPRECIATION FOR MAT PUR POSE. THE ASSESSING OFFICER NOTICED THAT WHILE COMPUTING ITS INCOME AS PER M AT, THE ASSESSEE CLAIMED DEDUCTION OF RS 35,72,28,867/- AS PER CLAUSE (III ) OF THE EXPLANATION TO SECOND PROVISO TO SUB-SECTION (2) OF SECTION 115JB AGAINST N ET BOOK PROFIT OF RS 20,76,31,798/-. ON PERUSAL OF THE YEAR-WISE DETAILS OF THE BOOK PROFIT, THE BROUGHT FORWARD BOOK LOSSES AND UNABSORBED BOOK DEPRECIATION, THE ASSESSING OFFICER FOUND THAT THE ASSESSEE DID NOT HAVE ANY AMOUNT AVAILA BLE FOR SET OFF AS PER CLAUSE (III) OF EXPLANATION TO SECOND PROVISO OF SUB-SECTI ON (2) OF SECTION 115JB. ON BEING REQUIRED BY THE ASSESSING OFFICER AS TO HOW THE AMOUNT OF RS 35,72,28,867/- HAS BEN DETERMINED AND TO JUSTIFY ITS ALLOWABILITY, A DETAILED SUBMISSION WAS MADE BY THE ASSESSEE INTER ALIA MENTIONING T HE YEAR-WISE PROFITS, LOSSES AND DEPRECIATION AND EXPLAINING THAT IT HAS FOLLOWED FIRST-IN-FIRST-OUT BASIS FOR ADJUSTING LOSSES AND DEPRECIATION AGAINST AVAILAB LE PROFIT. IT WAS CONTENDED BY THE ASSESSEE THAT THE METHOD FOLLOWED BY I T WAS THE MOST LOGICAL AND PROPER WAY FOR ADJUSTING THE LOSSES AND DEPRECIATION AND THAT IT WAS ENTITLED TO ARRANGE ITS AFFAIRS IN A MOST ADVANTAGEOUS MANNER UN LESS THERE WAS A LEGAL PROVISION AGAINST IT. AFTER CONSIDERING THE SUBMISSIONS O F THE ASSESSEE, THE ASSESSING OFFICER OBSERVED THAT THE ISSUE FOR CONSIDERATION WAS THAT WHEN THE AMOUNT OF BROUGHT FORWARD LOSSES OR UNABSORBED DEPRECIA TION, WHICHEVER IS LESS IS DEDUCTED IN COMPUTING BOOK PROFITS OF A COMPANY UNDE R SECTION 115JB, WILL THE AMOUNT OF SUCH LOSS OR DEPRECIATION TO BE CARRIED FORWAR D TO THE SUBSEQUENT YEARS GET REDUCED TO THE EXTENT OF SUCH SET OFF, AND IF YES, DOES THE ASSESSEE HAVE DISCRETION IN THE MANNER OF SUCH SET OFF OR WILL T HE SAME BE GOVERNED BY THE PROVISIONS OF SECTION 115JB RELATING TO COMPUTATION OF BOOK PROFITS. TAKING SUPPORT FROM THE DECISION OF THE AUTHORITY FOR ADVANCE RULING (AAR) IN THE CASE OF RASHTRIYA ISPAT NIGAM LTD. 285 ITR 1, THE ASSESSING OF FICER REJECTED THE METHOD ADOPTED BY THE ASSESSEE IN RESPECT OF SET OFF OF T HE BROUGHT FORWARD LOSSES AND UNABSORBED DEPRECIATION WHILE COMPUTING ITS IN COME AS PER MAT AND 5 WORKED OUT THE INCOME OF THE ASSESSEE AS PER MAT AT RS 20 ,24,35,238/- AS AGAINST NIL INCOME SHOWN BY THE ASSESSEE. 11 IN APPEAL BEFORE THE COMMISSIONER OF INCOME-TAX (AP PEALS), THE ASSESSEE FILED DETAILED WRITTEN SUBMISSIONS. HOWEVER, THE COMMISSI ONER OF INCOME-TAX (APPEALS) HELD THAT THE ASSESSING OFFICER WAS JUSTIFIED I N REJECTING THE ASSESSEES METHOD OF ADJUSTMENT OF CARRIED FORWARD BOOK LOSSES AND DEPRECIATION FOR MAT PURPOSES. BEING AGGRIEVED WITH THIS DECISION OF THE COM MISSIONER OF INCOME-TAX (APPEALS), ASSESSEE IS IN FURTHER APPEAL BEFORE US. 12 BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE HAS SU BMITTED THAT THE ASSESSING OFFICER HAS DISALLOWED ASSESSEES METHODOLOGY FOR AD JUSTMENT OF CARRIED FORWARD BOOK LOSSES AND DEPRECIATION FOR THE PURP OSES OF COMPUTING MINIMUM ALTERNATIVE TAX (MAT) UNDER SECTION 115JB OF THE ACT. IT IS POINTED OUT THAT THERE IS NO SPECIFIC METHOD PRESCRIBED UNDER THE STATUTE TO ADJUST CARRIED FORWARD BOOK LOSS AND DEPRECIATION AS PROVIDED FOR IN C LAUSE (III) OF EXPLANATION BELOW SECTION 115JB(2) OF THE ACT. IT IS SUBMITTED THAT IN SO FAR AS ASSESSEE IS CONCERNED, IT COMPUTED CARRIED FORWARD BOOK LOSSES AND DEP RECIATION AFTER ADJUSTING THE SAME ON FIRST IN FIRST OUT (FIFO) BASIS AGA INST THE PROFITS AVAILABLE IN THE PAST YEARS. IT IS POINTED OUT THAT IN SO FAR AS T HE ASSESSING OFFICER IS CONCERNED, HIS MANNER OF COMPUTING IS UNTENABLE AND IN- FACT, HE HAS PROCEEDED TO ADJUST THE UNABSORBED DEPRECIATION WITHOUT EVEN COMPARING AS TO WHETHER THE SAME WAS LOWER OR NOT IN COMPARISON TO THE BUSINESS LO SS. IN-FACT, CLAUSE (III) OF THE EXPLANATION PRESCRIBES ADJUSTMENTS FOR LOSS OR DEPR ECIATION AS PER BOOKS WHICHEVER IS LOWER. IN SO FAR AS THE RELIANCE ON THE JU DGMENT OF THE AUTHORITY FOR ADVANCE RULING IN THE CASE OF RASHTRIYA ISPAT NIGAM LTD . (SUPRA) IS CONCERNED, EVEN THAT HAS NOT BEEN APPROPRIATELY APPRECIATED BY T HE ASSESSING OFFICER, INASMUCH IN THAT DECISION ALSO, IT HAS BEEN UPHELD THAT T HE QUANTIFICATION OF CARRIED FORWARD UNABSORBED LOSS AND DEPRECIATION TO THE NEXT YEAR HAS TO BE DONE AFTER REDUCING FROM THE CURRENT YEARS PROFIT EIT HER THE LOSS OR DEPRECIATION, 6 WHICHEVER IS LOWER. THE LEARNED COUNSEL REFERRED TO A CHART WHEREIN IT IS SHOWN THAT THE WORKING CAN BE DONE ON MORE THAN ONE BASIS AND IN ANY CASE, THE WORKING ADOPTED BY THE ASSESSING OFFICER WAS UNTENABLE. 13 ON THE OTHER HAND, LEARNED CIT-DEPARTMENTAL REPR ESENTATIVE, DEFENDED THE ORDERS OF THE AUTHORITIES BELOW BY PLACING RELIANCE ON THE SAME. 14 WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. T HE SUM AND SUBSTANCE OF THE DISPUTE RELATES TO THE MANNER OF COMPUT ATION OF BOOK PROFITS FOR THE PURPOSES OF DETERMINING TAX LIABILITY UNDER SECTIO N 115JB OF THE ACT. EXPLANATION 1 BELOW 115JB(2) OF THE ACT PRESCRIBES THE A DJUSTMENTS REQUIRED TO BE MADE TO THE AMOUNT OF NET PROFIT AS SHOWN IN THE P ROFIT & LOSS ACCOUNT OF THE RELEVANT PREVIOUS YEAR, FOR THE PURPOSES OF COMPUTING BOOK PROFIT. THE PERTINENT DISPUTE RELATES TO CLAUSE (III) OF THE EXPLANATION THE RETO, WHICH READ AS UNDER: (III) THE AMOUNT OF LOSS BROUGHT FORWARD OR UNABSOR BED 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 I F THE AMOUNT OF LOSS BROUGHT FORWARD OR UNABSORBED DEPRECIATION IS NIL; OR 15. IN TERMS THEREOF, THE NET PROFIT SHOWN IN THE PRO FIT & LOSS ACCOUNT IS REQUIRED TO BE REDUCED BY THE AMOUNT OF LOSS BROUGHT FORWARD OR UNABSORBED DEPRECIATION WHICHEVER IS LESS AS PER BOOKS OF ACCOUNT, FOR C OMPUTING THE BOOK PROFITS. FOR THE PURPOSES OF AFORESAID CLAUSE, IT IS FURT HER EXPLAINED THAT THE TERM LOSS SHALL NOT INCLUDE DEPRECIATION AND THAT THIS CLAUSE IS NOT APPLICABLE WHERE THE AMOUNT OF LOSS BROUGHT FORWARD OR UNABSORBED DEPRECIA TION IS NIL. IN THE BACKGROUND OF THE AFORESAID, NOW WE MAY FIRST EXAMINE T HE COMPUTATION OF BOOK PROFIT MADE BY THE ASSESSEE IN THE RETURN OF INCOME. T HE NET PROFIT AS PER PROFIT & LOSS ACCOUNT ADOPTED BY THE ASSESSEE WAS RS 20,76,31,798/ -. WHILE COMPUTING THE LIABILITY UNDER SECTION 115JB, ASSESSEE, INTER ALIA, CLAIMED AN ADJUSTMENT OF RS 35,72,28,867/- IN TERMS OF AFORESAID CL AUSE (III) OF EXPLANATION BELOW 115JB OF THE ACT. IN THIS MANNER, THE BOOK PROFIT FOR THE PURPOSES OF 7 115JB(2) WAS DETERMINED AT NIL. THE CLAIM OF THE ASSE SSEE WAS BASED ON THE HEREINAFTER MENTIONED WORKINGS. AS ON 1.4.2005, THE AG GREGATE OF CARRIED FORWARD LOSSES AND DEPRECIATION AFTER NETTING OF THE PR OFITS FOR INTERMITTENT YEARS WAS DETAILED AS UNDER: FINANCIAL YEAR PROFIT LOSS DEPRECIATION 1994-95 3,15,54,669 1995-96 7,03,62,878 1996-97 8,44,03,032 8,97,39,166 1997-98 9,11,09,266 10,58,61,822 1998-99 28,05,39,414 11,57,42,667 1999-00 8,08,79,470 11,57,42,667 2000-01 21,99,52,999 11,93,65,159 2001-02 5,74,86,634 11,84,38,447 2002-03 2,97,02,890 2002-03 20,38,22,257 2003-04 31,71,55,566 65,25,98,260 81,43,70,815 66,85,72,522 16. THEREFORE, THE TOTAL CARRIED FORWARD DEFICIT WAS RS 83,03.45.077/-. THIS DEFICIT COMPRISES OF BUSINESS LOSS AND/OR UNABSORBED DEPR ECIATION WHICH IS RELEVANT FOR THE PURPOSES OF CLAUSE (III) OF EXPLANATI ON 1 TO SECTION 115JB(2) OF THE ACT. THE SET-OFF OF THE LOSSES AND DEPRECIATION PERT AINING TO FINANCIAL YEARS 1996-97 TO 2001-02 AGAINST THE AVAILABLE PROFITS OF O THER YEARS WAS DONE BY THE ASSESSEE IN THE FOLLOWING MANNER: FINANCIAL YEAR BUSINESS LOSS UNABSORBED DEPRECIATION TOTAL LOSSES 1996-97 8,44,03,032 8,97,39,166 17,41,42,198 1997-98 9,11,09,266 10,58,61,822 19,69,71,088 1998-99 28,05,39,414 11,57,42,667 39,62,82,081 1999-00 8,08,79,470 11,94,25,261 20,03,04,731 2000-01 21,99,52,999 11,93,65,159 33,93,18,158 2001-02 5,74,86,634 11,84,38,447 17,59,25,081 81,43,70,815 66,85,72,522 148,29,48,337 THUS, ON THE AFORESAID BASIS THE BREAK UP OF THE CONSOLI DATED DEFICIT OF RS 83,03,45,077/- AS ON 1.4.2004 CLAIMED WAS AS UNDER: 8 FINANCIAL YEAR BUSINESS LOSS UNABSORBED DEPRECIATION TOTAL LOSSES 1996-97 8,44,03,032 8,97,39,166 17,41,42,198 1997-98 9,11,09,266 10,58,61,822 19,69,71,088 1998-99 16,57,42,307 11,57,42,667 28,14,84,974 34,12,54,605 31,13,43,655 65,25,98,260 BREAK UP OF CARRIED FORWARD LOSSES AS ON 31.3.2004 FINANCIAL YEAR BUSINESS LOSS UNABSORBED DEPRECIATION TOTAL LOSSES 1998-99 11,47,97,107 - 11,47,97,107 1999-00 8,08,79,470 11,94,25,261 20,03,04,731 2000-01 21,99,52,999 11,93,65,159 33,93,18,158 2001-02 5,74,86,634 11,84,38,447 17,59,25,081 47,31,16,210 35,72,28,867 83,03,45,077 17. FROM THE AFORESAID TABULATIONS, THE TOTAL DEFICIT OF RS 83,03,45,077/- WAS COMPRISING OF A BUSINESS LOSS OF RS 47,31,16,210/- AND UNA BSORBED DEPRECIATION OF RS 35,72,28,867/-. THE AMOUNT OF UNABSORBED DEPRECI ATION BEING LOWER OF THE TWO AT RS 35,72,28,867/- WAS CONSIDERED BY THE ASSESSEE AS AN ADJUSTMENT AGAINST THE NET PROFIT PERMISSIBLE IN TERMS OF CLAUSE ( III) OF EXPLANATION 1 BELOW 115J B(2) OF THE ACT. 18. THE ASSESSING OFFICER, ON THE OTHER HAND, OBSERVED TH AT THE UNABSORBED DEPRECIATION AS ON 1.4.2003 OF RS 66,85,72,522/- IS TO BE ADJUSTED AGAINST THE AGGREGATE PROFITS OF 10,19,17,557/- FOR THE FINANCIA L YEARS 1994-95 AND 1995-96. THUS, AS PER HIM, THE UNABSORBED DEPRECIATION BROUGHT F ORWARD FOR AY 2003-04 WAS ONLY RS 56,66,54,975/-. THEREAFTER, THE ASSESSING OFF ICER APPLIED CLAUSE (III) OF EXPLANATION 1 FOR THE ASSESSMENT YEAR 2003-04 TO TH E INSTANT YEAR, I. E. ASSESSMENT YEAR 2005-06 IN THE FOLLOWING MANNER.: FOR A.Y. 2003-04 NET PROFITS TO THE AUDITED PROFIT & LOSS A/C. (AS PER PA RA 3.9 ABOVE) RS 23,35,25,147/- LESS: I) B/F. BUSINESS LOSS OF RS 81,43,70,815/- (II) UNABSORBED DEPRECIATION RS 56,66,54,975/- (AS PER PARA 3.8 ABOVE) WHICHEVER IS LESS RS 56,66,54,975/- BOOK PROFITS/LOSS (-) RS 33,31,29,828/- AMOUNTS TO BE CARRIED FORWARD TO AY 2004-05 BUSINESS LOSS RS 81,43,70,815/- 9 UNABSORBED DEPRECIATION (RS 56,66,54,975 23,35,25,147) RS 33,31,29,828/- FOR A.Y 2004-05 NET PROFITS TO THE AUDITED PROFIT & LOSS A/C. RS 31, 71,55,566/- LESS: I) B/F. BUSINESS LOSS OF RS 81,43,70,815/- (II) UNABSORBED DEPRECIATION RS 33,31,29,828/- WHICHEVER IS LESS RS 33,31,29,828/- BOOK PROFITS/LOSS (-) RS 1,59,74,262/- AMOUNTS TO BE CARRIED FORWARD TO AY 2005-06 BUSINESS LOSS RS 81,43,70,815/- UNABSORBED DEPRECIATION (RS 33,31,29,828 31,71,55,566) RS 1,59,74,262/- A.Y. 2005-06 NET PROFITS TO THE AUDITED PROFIT & LOSS A/C. (AS PER PARA 3.10 ABOVE) RS 21,84,09,500/- LESS: I) B/F. BUSINESS LOSS OF RS 81,43,70,815/- (II) UNABSORBED DEPRECIATION RS 1,59,74,262 WHICHEVER IS LESS RS 1,59,74,262/- BOOK PROFITS RS 20,24,35,238/- AMOUNTS TO BE CARRIED FORWARD TO AY 06-07 BUSINESS LOSS RS 81,43,70,815/- UNABSORBED DEPRECIATION (RS 1,59,74,262 1,59,74,262) RS NIL 19. IN THIS MANNER, THE ASSESSING OFFICER COMPUTED BOOK PR OFITS FOR SECTION 115JB AT RS 20,24,35,238/- AS AGAINST NIL DETERMINED BY THE ASSESSEE. WE HAVE EXAMINED THE POSITION SET-UP BY THE ASSESSING OFFICER. QU ITE CLEARLY, CLAUSE (III) OF EXPLANATION 1 TO SECTION 115JB ENVISAGES ADJUSTMENT FO R THE AMOUNT OF LOSS BROUGHT FORWARD OR UNABSORBED DEPRECIATION, WHICHEVER IS LESS AS PER BOOKS OF ACCOUNT. IT IS QUITE CLEAR THAT THE LOSS DEPICTED IN THE ACCOUNT BOOKS WHICH COMPRISES OF BUSINESS LOSSES AND DEPRECIATION IS REQUIRED TO BE SPLIT UP FOR THE PURPOSES OF CLAUSE (III) OF EXPLANATION 1 TO SECTION 115 JB(2). SO, HOWEVER, THE MANNER OF DETERMINING THE INDIVIDUAL FIGURES OF LOSS A ND DEPRECIATION IS NOT INDICATED IN SECTION 115JB INASMUCH AS THE MANNER IN WHICH THE LOSSES AND DEPRECIATION ARE SET OFF AGAINST THE PROFITS HAS NOT BE EN SPELT OUT. HOWEVER, AN INDICATION WHICH IS MANIFESTED IN SECTION 115JB ITSELF IS A SAFE PREMISE TO FOLLOW IN SUCH A SITUATION. CLAUSE (III) SPEAKS OF ADJUSTMENT FOR THE LOWER OF BROUGHT FORWARD LOSS OR UNABSORBED DEPRECIATION. THEREFORE, TH E LEGISLATURE ENVISAGED 10 THAT WHILE COMPUTING BOOK PROFITS FOR 115JB, REDUCTION B E ALLOWED FOR THE LOWER OF CARRIED FORWARD LOSSES OR UNABSORBED DEPRECIATION OF THE PAST YEARS. THEREFORE, THE DETERMINATION OF SUCH LOSSES OR DEPRECIATION IN THE PAST YEARS BE ALSO MADE ON SIMILAR PROPOSITION, IN THE ABSENCE OF ANY SPECIFIC PRO VISION IN THE STATUTE. EVEN IN THE PAST YEARS, THE LOSSES AND DEPRECIATION TO B E CARRIED FORWARD BE DETERMINED ON THE SIMILAR PRINCIPLES, I.E. AFTER SETT ING OFF OF THE LOWER OF DEPRECIATION OR LOSSES. APART FROM THE FACT THAT THERE IS NO SPECIFIC PROVISION IN THE STATUTE, WE ARE ALSO GUIDED BY THE SPIRIT OF SECTIO N 205(1)(B) OF THE COMPANIES ACT, 1956. IN TERMS OF SECTION 205(1)(B) ALSO, THE SURPLUS IS TO BE DETERMINED AFTER REDUCING LOWER OF THE LOSS OR DEPRECI ATION. THOUGH STRICTLY SPEAKING THE RULE OF SECTION 205(1)(B) OF THE COMPANIE S ACT IS NOT APPLICABLE, INASMUCH AS FOR THE PURPOSES OF THE SAID SECTION THE EXPRE SSION LOSS INCLUDES DEPRECIATION, WHEREAS FOR THE PURPOSES OF SECTION 115JB IT IS SPECIFICALLY PROVIDED THAT FOR CLAUSE (III) OF EXPLANATION 1 THE EXPRESSION LOSS SHALL NOT INCLUDE DEPRECIATION. SO, HOWEVER, WE WANT TO EMPHASIS ON THE BASIC PRINCIPLE ENSHRINED IN SECTION 115JB WHEREBY THE LOWER OF LOSS OR DEPRECIATI ON IS REDUCIBLE TO ARRIVE AT THE SURPLUS. SECTION 115JB(2) ITSELF REFERS TO A PR OFIT & LOSS ACCOUNT PREPARED IN ACCORDANCE WITH THE PROVISIONS OF COMPANIES ACT, 1956 AND THEREFORE, IN OUR VIEW, THE PROPOSITION IN SECTION 205(1)(B) BECOMES RELEV ANT. FOR THE AFORESAID TWIN REASONS, IN OUR VIEW, IN ORDER TO DETERMINE THE LOSSES CARRIED FORWARD AND UNABSORBED DEPRECIATION IN THE PAST YEARS ALSO, IT WOULD BE APPROPRIATE TO REDUCE THE LOWER OF THE TWO AND THEREAFTER, ASCERTAIN THE A MOUNT OF LOSSES BROUGHT FORWARD AND UNABSORBED DEPRECIATION. 20. CONSIDERED IN THE AFORESAID MANNER, IN OUR VIEW, THE METHODOLOGY ADOPTED BY THE ASSESSING OFFICER HAS TO FAIL. THIS IS FOR THE REASON THAT HE HAS PROCEEDED TO ADJUST THE UNABSORBED DEPRECIATION AS ON 31 .3.2003, WHEREAS THE CORRECT APPROACH WOULD HAVE BEEN TO COMPARE AND DETERM INE THE LOSSES IN EACH OF THE FINANCIAL YEARS STARTING FROM THE FINANCIAL YEAR 1996-97 AND DETERMINE THE LOSS OR DEPRECIATION WHICH IS REQUIRED TO BE CARRIED FORW ARD IN ACCORDANCE WITH 11 THE AFORESAID DISCUSSION. IN FACT, WE FIND THAT EVEN THE WORKING ADOPTED BY THE ASSESSEE IN THE RETURN OF INCOME ALSO DOES NOT CORRESPOND TO THE AFORESAID PRINCIPLES. UNDER THESE CIRCUMSTANCES, WE, THEREFORE, DEEM IT FIT AND PROPER TO SET-ASIDE THE ORDER OF THE COMMISSIONER OF INCOME-TAX (A PPEALS) AND TO REMIT THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER, WHO SHAL L REVISIT THE WORKING OF BOOK PROFIT FOR THE PURPOSES OF SECTION 115JB IN SO FAR AS IT RELATES TO CLAUSE (III) OF EXPLANATION 1 TO SECTION 115JB(2) OF THE ACT. THE ASSESSING OFFICER SHALL CARRY OUT THE AFORESAID LIMITED EXERCISE IN ACCORDANCE WI TH OUR AFORESAID DISCUSSION AND AFTER ALLOWING THE ASSESSEE A REASONABLE OPPO RTUNITY OF BEING HEARD AS PER LAW. 21. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOW ED. DECISION PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 30 TH NOVEMBER, 2011 SD/- SD/- (I.C. SUDHIR) JUDICIAL MEMBER (G.S. PANNU) ACCOUNTANT MEMBER PUNE: DATED: 30/11/2011 B COPY OF THE ORDER IS FORWARDED TO : 1. KIRLOSKAR FERROUS INDUSTRIES LTD., PUNE 2. THE ADDL. CIT, R-9, PUNE 3. THE CIT(A)-III, PUNE 4. THE CIT-V PUNE 5. THE D.R, B BENCH, PUNE 6. GUARD FILE TRUE COPY BY ORDER ASSISTANT REGISTRAR ITAT, PUNE BENCHES, PUNE 12