ITAT Quashes Section 154 Rectification on MAT Losses In Fiat India Automobiles Case

Fiat India Automobiles Pvt. Ltd. filed its return for AY 2014-15 declaring nil income after set-off of brought forward losses. The assessment was completed under Section 143(3) read with Section 144C, wherein additions were made but tax was ultimately levied only under Section 115JB. In the immediately preceding year (AY 2013-14), pursuant to a capital reduction scheme sanctioned by the High Court, the assessee reduced Rs. 300 crore from accumulated book losses on a proportionate basis between business loss and unabsorbed depreciation. This treatment was accepted in scrutiny assessment for AY 2013-14, and the resultant carried-forward figures were adopted in AY 2014-15.

Therefore, the Assessing Officer initiated rectification proceedings under Section 154 for AY 2014-15, proposing to recompute book profits under Section 115JB by reallocating the entire capital reduction using a FIFO approach and denying reduction of brought forward business loss. A rectification order raising a MAT demand of over Rs. 40 crore was passed. The CIT(A) partly upheld the action but directed proportionate recomputation. Both the assessee and the Revenue filed cross-appeals before the Tribunal.

Issue before Tribunal: Whether the manner of adjustment of brought forward business loss and unabsorbed depreciation for MAT computation under Section 115JB, pursuant to a capital reduction scheme already accepted in earlier scrutiny, could be altered through rectification proceedings under Section 154.

ITAT’s Ruling: The ITAT Pune allowed the assessee’s appeal and quashed the rectification proceedings in full. The Tribunal held that once the capital reduction scheme and the resultant carry-forward of losses had been examined and accepted in scrutiny assessment for AY 2013-14, the Assessing Officer was not entitled to disturb those figures in a subsequent year by invoking Section 154.

The Tribunal further observed that neither the Income-tax Act nor the Rules or any binding circular prescribes a specific method for adjusting capital reduction against business loss and unabsorbed depreciation for Section 115JB. The fact that the Assessing Officer applied a FIFO method while the CIT(A) adopted a proportionate method itself showed that the issue was highly debatable.

Relying on the Supreme Court decision in T.S. Balaram v. Volkart Brothers and the Calcutta High Court ruling in PCIT v. Lanshree Products & Services Ltd., the Tribunal held that a debatable issue involving interpretation of law cannot be treated as a “mistake apparent from the record”. Thus, the rectification order dated 31.03.2022 was held to be illegal and without jurisdiction. Therefore, the Revenue’s cross-appeal was dismissed as infructuous.

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