1. The querist, a company, is
expecting to earn profits for the previous year relevant to A.Y. 2004-05. Losses
were incurred in previous years relevant to A.Y. 2001-02 to 2003-04, but in
years prior to the same, it had earned healthy profits, out of which general
reserves had been created. In its balance sheets for the three years when losses
were incurred, the querist company had shown accumulated loss/depreciation as
deduction against ‘General Reserve’ as per requirements of Schedule VI.
2. The querist has neither
passed any Journal entry in its books of account, nor any resolution has been
passed by the Board of Directors for set off of the losses against general
reserves and that the deduction shown in the balance sheet was only as a matter
of presentation. Separate ledger accounts exist in the books of accounts
for general reserves and accumulated losses. Also, general reserves were
appropriated out of profits of years prior to the year(s) in which the loss has
3. On the above facts, the
querist seeks opinion as to whether the losses/depreciation of earlier years
would be allowed as deduction in computing the book profit for the current year
in accordance with S. 115JB ?
Object of MAT provisions :
4. Provisions relating to
Minimum Alternate Tax (MAT) were first introduced by S. 115J by the Finance Act,
1987 with effect from 1-4-1988 to provide for levy of tax on the book profits of
companies which were otherwise not liable to tax on account of their total
income being NIL due to various incentives claimed. The intent of the provision
was to ensure that companies having large profits and declaring substantial
dividends pay a percentage of the book profit as minimum alternate tax, if their
tax liability was otherwise less than the said amount. S. 80VVA was the
forerunner to the provisions of MAT.
S. 115J :
5. Clause (iv) of the
Explanation to S. 115J(1A) provided that the book profit so arrived at shall be
reduced by the amount of any brought forward losses or unabsorbed depreciation,
whichever is less, as per S. 205(1)(b) of the Companies Act, 1956. Provisions of
MAT, as originally enacted, called for determination of unabsorbed loss or
depreciation as calculated in terms of S. 205(1)(b) of the Companies Act,
according to which, if the company had incurred loss for any earlier year(s),
then the amount of the loss or an amount equal to the amount provided for
depreciation for that year, 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 earlier year(s),
arrived at after providing for depreciation.
6. Due to reference to S.
205(1)(b) of the Companies Act and difference in concept of unabsorbed losses
and depreciation as per books and as per income-tax act, dispute arose as to
whether the loss would include depreciation. The same was put to rest by the
decision of the Supreme Court in Surana Steels Ltd. v. Dy. CIT, (1999)
237 ITR 777 (SC), which held that the loss would include depreciation.
7. The provision of S. 115J
remained on the statute book for A.Ys. 1989-90 and 1990-91.
S. 115JA :
8. The Finance (No. 2) Act, 1996
with effect from 1-4-1997 reintroduced MAT by S. 115JA. In the new Section,
clause (iii) of Explanation to S. 115JA(2) provided that the book profit is to
be reduced by the amount of loss brought forward or unabsorbed depreciation,
whichever is less as per the books of account and that the loss shall not
9. An important change as
compared to S. 115J was that the provisions of S. 205(1)(b) of the Companies Act
were not referred to and it was also clarified that loss shall not include
depreciation. By the said change, set off of unabsorbed loss and depreciation is
in line with income-tax concept of loss and depreciation being treated
separately and carried forward independently, unlike the concept in accounting
of loss being all inclusive including depreciation.
S. 115JB :
10. S. 115JA was replaced by S.
115JB by the Finance Act, 2000 with effect from 1-4-2001. The case of the
querist is concerned with the provision of S. 115JB. Clause (iii) of Explanation
to S. 115JB(2) provides that the book profit is to be reduced by the amount of
loss brought forward or unabsorbed depreciation, whichever is less as per the
books of account and the loss shall not include depreciation and the provision
will not apply if the amount of loss brought forward or unabsorbed depreciation
Clause (iii) of Explanation to S.
11. The issue revolves around
the wordings of clause (iii) of Explanation to S. 115JB(2). As per the said
clause, the brought forward loss or unabsorbed depreciation, whichever is less as
per the books of account is to be reduced while computing taxable book
12. The emphasis is thus on the
wordings ‘as per the books of account’. The issue is whether presentation of
the brought forward loss or unabsorbed depreciation as being reduced from
earlier years’ accumulated general reserves in the balance sheet in accordance
with requirements of Schedule VI of Companies Act, can be interpreted as
adjustment/set off of losses against such general reserve, so that there remains
no brought forward loss or unabsorbed depreciation that could be set off against
the current year’s book profit.
‘As per the books of account’
— what it connotes :
13. As different rules for
determination of business income for the purpose of taxation are prescribed, it
is not uncommon that figures of profit, depreciation, losses and unabsorbed
depreciation would be different amounts as per books and as per income-tax act.
The words ‘as per the books of account’ means brought forward loss or
unabsorbed depreciation quantified as per the books of account maintained i.e.,
book loss or book depreciation in contrast to the brought forward loss or
unabsorbed depreciation quantified as per the income-tax provision. This is for
the simple reason that the computation of the taxable book profits starts with
the profit as per the books of account computed in accordance with Parts II and
III of Schedule VI of the Companies Act, 1956. This view gets strengthened by
the provisions of other clauses of the Explanation to S. 115JB(2). For example
— clauses (iv), (v) and (vi) to the Explanation categorically refer to the
amounts of profits to be computed as per the provisions of the particular
Section of the Income-tax Act. Clause (iv) refers to the benefit to be provided
for the profits derived from exports included in the book profits. As per clause
(iv), deduction from the book profits of export profits would be the amount of
profit calculated as per the provisions of S. 80 HHC of the Act itself and not
as per the books.
14. Thus, wherever the
legislature deemed it fit to reduce the book profit as per the computation of
the income-tax provisions, appropriate wordings are placed in the relevant
clauses. Thus, the meaning of the words, ‘as per books’, used in
clause (iii) to Explanation to S. 115JB(2) would mean the brought forward book
loss or unabsorbed book depreciation and not as per the income-tax provisions.
Effect of presentation in Balance Sheet :
15. The next issue that arises
is whether by reflection of accumulated losses as reduction from general
reserves in balance sheet, it can be said that there are no losses as per the
books of accounts.
16. S. 210 of the Companies Act
provides that at every annual general meeting of the Company, the Board of
Directors of the Company shall lay before the company a balance sheet as at the
end of the period and a profit and loss account for that period. However, the
term balance sheet is not defined under the Companies Act. S. 211 of the
Companies Act provides for the form and contents of balance sheet. S. 211(1)
provides that :
"Every balance sheet
of a company shall give a true and fair view of the state of affairs of the
company as at the end of the financial year and shall, subject to the
provisions of this Section, be in the form set out in Part I of Schedule VI,
or . . . . . .; and in preparing the balance
sheet, due regard shall be had, as far as may be, to the general instructions
for preparation of balance sheet under the heading ‘Notes’ at the end of
17. Some relevant entries
regarding the term ‘balance sheet’ in Law Lexicon by P. Ramanatha Aiyer,
2004 edition are :
"A statement which
would exhibit all the balances of debits and credits, the value of
merchandise, and the result of the whole made of merchants and others to show
the true state of a particular business. Credits and debit entries of
mercantile dealings exhibited together on a single page, and so grouped and
arranged as to close into each other and be summed up in one general result,
constitute the ‘balance sheet’. It is a statement designed to show the
assets and liabilities and the profit and losses of a company. (Marsh, Bank
"A balance sheet need
not be and must not be a mere inventory. It is supposed to be pictorial
representation of the trading position of the company easily appreciated not
by ignorant people but by persons who are reasonably able to understand
commercial expressions and commercial conditions. Legal Remembrancer v.
Akhil Bandu, (1936) 6 Com. Cases 464, 471 (Cal.)."
18. It can be said that a
balance sheet is a document whose function is to show the source of funds in the
form of capital and liabilities and how funds have been applied in the form of
assets. The same needs to be in the form set out in Part I of Schedule VI.
Balance sheet is not a mere collection of closing balance of all accounts in
books, but presentation of such closing balance in the prescribed manner. It is
different from a trial balance, which merely lists out all the accounts as per
books and would be totally unintelligible to person not involved in accounting
of the company. Balance sheet is the presentation of such balances as per books
in a particular manner, and thus, the same may not necessarily be in the same
manner as the accounts may be reflected in the books of account. Though balance
sheet is a financial statement derived from the books of accounts, it is not an
exact photocopy of the books of accounts, but the accounts so derived are
put in the prescribed format. In the books of account, different accounts may be
shown separately, however, for the purpose of balance sheet, the same may have
to be aggregated and reflected as per the form set out in Part I of Schedule VI.
In other words, Part I of Schedule VI is merely a presentation format of the
balance sheet and does not necessarily represent each account as actually
maintained in the books of accounts.
19. Notes to Part I of Schedule
VI specifically direct that — ‘The debit balance in the Profit and Loss
Account shall be shown as a deduction from the uncommitted reserves, if any’.
As such, reduction of the debit balance in the profit and loss account from the
uncommitted reserves is only a form of presentation as stipulated in Part I of
Schedule VI of the Companies Act and it does not mean that loss has been
absorbed by past reserves in the books of account. The word used in the general
instructions is that the debit balance in profit and loss account be ‘shown’
as reduction from general reserves. It nowhere states that the same has to be
adjusted or set off with the general reserves or that the same also needs to be
in conformity with the actual books of account i.e., in the books of
account also the debit balance be reduced from the general reserves by way of a
20. Thus, actual books of
account show separate ledger accounts in respect of the brought forward loss and
unabsorbed depreciation, however, for the purpose of presentation, which is
merely in the form set out, the same is shown as reduction from the uncommitted
21. It can, therefore, be
concluded that merely because losses have been shown as reduced from
general reserves does not mean that the same have been
necessarily absorbed by general reserves and that there are no accumulated
losses as per the books of accounts.
Carry backward of losses for absorption :
22. General reserve is nothing
but the accumulated profits over a period of years, which is available for
payment of dividends, issue of bonus shares, etc. Profits transferred to general
reserve are profits after payment of taxes. Thus, the company has already faced
tax burden on the profits accumulated and shown as general reserves.
23. The concept of carry
backward of losses and adjusting the same with past profits does not exist in
Indian Tax Laws. Set off of losses is provided under the Act only to give
benefit of non-payment of tax on future profits to the extent of losses incurred
in past subject to satisfaction of prescribed conditions. Losses are to be set
off against profits earned in years subsequent to the year in which losses have
been incurred and no refund or rebate out of taxes paid on profits in the past
24. Under the Companies Act,
absorption of losses is dealt with by S. 205(1)(b) and it is for the purpose of
declaration of dividend and for no other purpose. S. 205(1)(b) of the Companies
Act provides that where there has been loss in any previous year, the amount of
the loss or an amount equal to the amount of the depreciation provided for that
year, whichever is less, should be set off against the profits of the year for
which dividend is proposed. In any case, reference to S. 205(1)(b) has been
excluded while inserting new provisions of MAT in terms of S. 115JA and S.
115JB. Thus, for the purposes of S. 115JB of the Income-tax Act, it can be
concluded that the concept of set off of loss and depreciation is the same as
under Income-tax Act and, therefore, there can be no carry backward of losses to
be adjusted against profit of years prior to the year in which loss is incurred.
25. Once having concluded that
there is no carry backward provisions, the losses incurred during the relevant
year(s) could not be said to have been absorbed by the past profits,
irrespective of whether for the disclosure and presentation purposes, the same
have to be shown as a deduction from uncommitted reserves in compliance with
Part I of Schedule VI to the Companies Act.
26. Even otherwise, if the
legislature intent and the underlying object of the provisions of MAT are
considered, the company ought to get the benefit of loss incurred before
invoking the deeming provisions and levying tax on the basis of book profit.
Since the company has already borne the burden of taxes on the past profits,
which are ultimately reflected in the form of general reserves, the benefit of
set off ought to be allowed against later year’s profits, else the benefit of
set off would be denied to the assessee. This is against the intention of the
legislature of allowing set off of losses while taxing the companies on the
basis of deeming provisions in terms of MAT.
27. Therefore, the concept of
carry forward and set off as provided in the Income-tax Act prevails and the
same concept would need to be followed while computing the book profits.
28. Having regard to the
following facts, the querist has a good case to contend that losses and
depreciation of earlier years are as per the books of accounts and are available
for deduction in determining book profits :
ŕ Though the brought forward
loss and unabsorbed depreciation are shown as reduction in the balance sheet,
the same are shown separately in the books of account and are carried forward
from year to year in the books of account without being adjusted with the
general reserves by passing appropriate journal entry;
ŕ No Board Resolution
disclosing any conscious decision to adjust the loss incurred with past
profits in the books of account;
ŕ The general reserve in the balance sheet is
out of the past profits and that no profits were earned after losses were
incurred except in the year under consideration.