Pranav B Prem

The Pune Bench of the Income Tax Appellate Tribunal has quashed a tax demand of ₹40.68 crore raised against Fiat India Automobiles Pvt. Ltd., holding that adjustments relating to brought-forward losses and unabsorbed depreciation while computing book profits under Section 115JB of the Income-tax Act, 1961 involve debatable issues of law and cannot be undertaken through rectification proceedings under Section 154.

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The Division Bench comprising Vinay Bhamore (Judicial Member) and Manish Borad (Accountant Member) observed that the Income-tax Act and the Rules do not prescribe any specific methodology for adjusting capital reduction against accumulated book losses under the MAT provisions. Whether such adjustment should be made on a FIFO basis or on a proportionate basis is a matter on which more than one view is possible, rendering the issue debatable and outside the scope of Section 154.

Fiat India, engaged in the manufacture and sale of passenger cars, engines, and gearboxes, had filed its return of income for Assessment Year 2014–15 declaring nil income after setting off brought-forward losses. The assessment was completed under Section 143(3) read with Section 144C, wherein the Assessing Officer accepted the computation of book profits under Section 115JB and raised no tax demand.

Subsequently, the Assessing Officer issued a notice under Section 154 alleging a mistake apparent on record in allowing the set-off of brought-forward business losses while computing book profits under MAT. The Assessing Officer took the view that pursuant to a capital reduction scheme approved by the Bombay High Court, no brought-forward losses were available for adjustment under Section 115JB. A rectification order dated 31 March 2022 was passed, recomputing the book profits and raising a tax demand of ₹40.68 crore along with interest.

The controversy arose from a ₹300-crore capital reduction scheme implemented by the assessee in Financial Year 2012–13 pursuant to a Bombay High Court order. The scheme did not specify the manner in which the capital reduction was to be adjusted against accumulated book losses, which comprised both business losses and unabsorbed depreciation.

The assessee had adjusted the capital reduction proportionately between business losses and unabsorbed depreciation and carried forward the balances, which was accepted by the Department during scrutiny assessment for Assessment Year 2013–14. However, in the rectification proceedings for Assessment Year 2014–15, the Assessing Officer sought to retrospectively apply a FIFO method and treated the entire capital reduction as having wiped out earlier business losses.

On appeal, the Commissioner of Income Tax (Appeals) partly allowed the assessee’s appeal. While agreeing with the Assessing Officer that FIFO could be applied, the CIT(A) held that it was incorrect to adjust the entire capital reduction only against business losses. The CIT(A) directed the Assessing Officer to recompute book profits by allocating the capital reduction proportionately between business losses and unabsorbed depreciation. Both the assessee and the Revenue carried the matter in appeal before the Tribunal.

The Tribunal noted that the Department had accepted the assessee’s method of loss adjustment in Assessment Year 2013–14 during scrutiny assessment. Having allowed the carry-forward of losses and depreciation in that year, the Assessing Officer could not indirectly disturb the same figures through rectification proceedings in Assessment Year 2014–15.

Relying on the Calcutta High Court’s decision in PCIT v. Lanshree Products & Services Ltd. and the landmark judgment of the Supreme Court in T.S. Balaram, ITO v. Volkart Brothers, the Tribunal reiterated that issues requiring interpretation of law, or where two views are possible, cannot be treated as mistakes apparent from the record. Such debatable issues fall outside the limited scope of rectification under Section 154.

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The Tribunal held that the Assessing Officer had effectively attempted to revisit and reinterpret the provisions of Section 115JB through Section 154 proceedings, which is impermissible in law. It observed that once the capital reduction and the method of adjustment had attained finality in earlier assessment proceedings, the same could not be unsettled through rectification. Accordingly, the Tribunal quashed the rectification order passed under Section 154 as illegal and bad in law. The tax demand of ₹40.68 crore along with consequential interest was set aside in full. The appeal filed by Fiat India Automobiles Pvt. Ltd. was allowed, and the Revenue’s cross-appeal was dismissed as infructuous.

Case Title: M/s. Fiat India Automobiles Private Limited Versus ACIT

Case No.: ITA No.1027/PUN/2025

Coram: Vinay Bhamore (Judicial Member) and Manish Borad (Accountant Member)