The Mumbai ITAT recently clarified that the adjustments to the net profit for computing book profit under Section 115JB of the Income Tax Act are to be strictly made in accordance with the clauses specified in the Explanation to the said section, and there is no express provision under Explanation 1 permitting the addition of the share of loss from a partnership firm, unless it is in the nature of expenditure relatable to exempt income or any other specified item.
Hence, the Tribunal held that the action of the AO in adding back the Birla Group’s (Appellants) share of loss from the partnership firm to the book profits under section 115JB is not in accordance with law. Reference was made to the decision of the Co-ordinate Bench in the case of Deputy Commissioner of Income-tax vs. Metro Exporters Ltd. [(2006) 10 SOT 647 (Mum)], where it was held that “the mechanism under section 115JB does not contemplate adjustment of losses from a partnership firm unless they fall under the specified heads of additions or deductions in the Explanation”.
The Division Bench comprising Anikesh Banerjee (Judicial Member) and Narendra Kumar Billaiya (Accountant Member) observed that the issue at hand basically pertains to the manner of computation of book profit under section 115JB, which is a special code, and the treatment of items in the Profit and Loss Account under that code. The Bench further explained that the proposition that loss is negative income cannot be extended mechanically to make additions unless expressly permitted by the Explanation to section 115JB.
In this case, the appellant’s assessment was completed, accepting the returned income as well as the book profit computed under section 115JB. However, later, by pursuing the provisions of Section 263, the Principal CIT set aside the assessment order and directed the AO to make a fresh assessment. The AO accordingly, passed the ‘Order Giving effect’ (OGE) wherein he added back the share of loss from the partnership firm in MAT under section 115JB.
Appearances:
Advocates Ronak Doshi & Pranav Zanwar, for the Appellant/ Taxpayer
Advocate Swapnil Choudhary, for the Respondent/ Revenue