The Mumbai Bench of Income Tax Appellate Tribunal (ITAT ) ruled that partnership firm losses cannot be added back while calculating book profit under section 115JB of Income Tax Act,1961.

Birla Group Holding Private Limited,appellant-assessee,had its assessment completed under section 143(3) by accepting the returned income and book profit under section 115JB. Later, the Principal Commissioner of Income Tax (PCIT), invoked section 263 and set aside the assessment, directing a fresh assessment.

The Assessing Officer (AO) passed an ‘Order Giving Effect’ (OGE), adding back the share of loss from a partnership firm in computing MAT under section 115JB. The assessee’s appeal before the CIT(A) was dismissed, and the assessee then filed an appeal before the tribunal.

The assessee counsel submitted arguments and a paper book, which was taken on record. The counsel argued that the assessee had a loss from its share in a partnership firm, which was recorded in the Profit and Loss Account. However, the AO added this loss back while computing book profit under section 115JB, treating it as negative income. The counsel said the only issue was this adjustment of the partnership loss.

The AO noted that the share of profit from the partnership was exempt under section 10(2A), so the corresponding loss could not be set off against taxable income. The counsel argued that since the loss was recorded in the Profit and Loss Account, it should not be added back when calculating book profit.

The counsel relied on ITAT Mumbai and Delhi decisions, which held that only amounts credited to the Profit and Loss Account could affect book profit, and losses debited could not be added back.

The Department Counsel further relied on the ITAT Chennai decision in DCIT vs. Fixit (P.) Ltd. (2018), which held that the share of loss in a partnership firm is negative income and cannot be excluded while computing book profit under section 115JB. The ITAT observed that the AO’s addition of the loss to profits was correct under Explanation (ii) to section 115JB. The two member bench comprising Anikesh Banerjee (Judicial Member) and Narendra Kumar Billaiya (Accountant Member) examined the submissions, record materials, and relevant judicial precedents.

The main issue was whether the share of loss from a partnership firm, debited in the Profit and Loss Account, should be added back while computing book profits under section 115JB by applying clause (f) or clause (ii) of Explanation 1 to section 115JB(2).

The AO added back the loss under clause (f), treating it as related to exempt income under section 10(2A), and the Commissioner of Income Tax (Appeals)[CIT(A)] agreed, reasoning that exempt income included both profits and losses.

However, the appellate tribunal accepted the AR’s arguments and referred to earlier rulings, including Metro Exporters Ltd. and Roxy Investments Pvt. Ltd., which held that a loss, being a negative figure, cannot be treated as expenditure related to exempt income for add-back purposes. Only exempt income amounts credited to the Profit and Loss Account qualify for exclusion under the relevant clauses.

The tribunal found the revenue’s reliance on other judgments misplaced, stating that book profit computation under section 115JB must follow the specific provisions of the Explanation strictly. Losses could not be mechanically added back unless explicitly provided for.

Therefore, the ITAT concluded that the AO’s addition of the share of loss from the partnership firm to book profits was incorrect, and the CIT(A) erred in confirming that addition.

Accordingly the appeal was allowed.

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