Full Judgment Text
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CASE NO.:
Appeal (civil) 6100 of 1998
Appeal (civil) 2518-2519 of 1999
PETITIONER:
APOLLO TYRES LTD.
Vs.
RESPONDENT:
CKOOMCMHIISSIONER OF INCOME TAX,
DATE OF JUDGMENT: 02/05/2002
BENCH:
CJI, N. Santosh Hegde & D.M. Dharmadhikari
JUDGMENT:
SANTOSH HEGDE, J
These appeals arise out of a common judgment
delivered by a Division Bench of the Kerala High Court in
ITR Nos.70/1994 and 43/1997.
Civil Appeal No.6100/1998 is preferred by the assessee
company and Civil Appeal Nos. 2518-19/1999 are preferred
by the C.I.T., Ernakulam.
Though a number of questions came up for
consideration before the High Court, in these appeals, based
on the arguments addressed before us, we are mainly
concerned with the following three questions :
(i) Can an Assessing Officer while assessing a
company for income tax under Section 115-J of
the Income Tax Act question the correctness of
the profit and loss account prepared by the
assessee company and certified by the statutory
auditors of the company as having been prepared
in accordance with the requirements of Parts II
and III of Schedule VI to the Companies Act ?
(ii) Whether the dividend income earned by the
assessee company from its investment made in the
units of Unit Trust of India, can be included in
computing the profit of the eligible business under
Section 32AB of the Income Tax Act ?
(iii) Whether the business of buying and selling of
units of Unit Trust of India by the assessee
company amounts to a speculation business or
not, for the purpose of allowing set off as to the
loss suffered by the company in such a business ?
Brief facts necessary for the disposal of first of the
above questions are as follows :
The assessee company while determining its net profit
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for the relevant accounting year has provided for arrears of
depreciation in its profit and loss account which according to
the Revenue is not in accordance with Part II and III of
Schedule VI to the Companies Act, 1956 (the ’Companies
Act’). Hence, the assessing officer while considering the case
of the assessee company under Section 115-J of the IT Act
recomputed the said profit and loss account of the company
so as to exclude the provisions made for arrears of
depreciation. The said action of the assessing officer in
questioning the correctness of the accounts maintained by the
company was challenged by the company before the Income
Tax Appellate Tribunal (’the tribunal’) which among other
things held that the assessing officer has no authority to
reopen the accounts of a company which is certified by the
auditors of the company as having been maintained in
accordance with the provisions of the Companies Act and
which account has been accepted in the General Meeting of
the Company as well as by the Registrar of Companies. This
view of the tribunal was not accepted by the High Court
which held that the assessing officer has the authority to
examine whether the accounts of the company have been
maintained in accordance with the requirement of sub-section
(1A) of Section 115-J and in that process if he finds that the
accounts of the company are not in accordance with the
provisions of the Companies Act, he could make the
necessary changes before proceeding to assess the company
for tax under the Explanation to Section 115-J of the IT Act.
The relevant part of Section 115-J of the IT Act reads
as follows:-
"115-J. (1) Notwithstanding anything
contained in any other provision of this Act,
where in the case of an assessee being a
company [(other than a company engaged in
the business of generation or distribution of
electricity)], the total income, as computed
under this Act in respect of any previous year
relevant to the assessment year commencing on
or after the 1st day of April, 1988 [but before
the 1st day of April, 1991] (hereinafter in this
section referred to as the relevant previous
year), is less than thirty per cent of its book
profit, the total income of such assessee
chargeable to tax for the relevant previous year
shall be deemed to be an amount equal to thirty
per cent of such book profit.
[(1A) Every assessee, being a company,
shall, for the purposes of this section, prepare
its profit and loss account for the relevant
previous year in accordance with the provisions
of Parts II and III of Schedule VI to the
Companies Act, 1956 (1 of 1956).]
Explanation.- For the purposes of this
section, "book profit" means the net profit as
shown in the profit and loss account for the
relevant previous year [prepared under sub-
section (1A)], as increased by
(a) the amount of income-tax paid or payable,
and the provision therefor; or
(b) the amounts carried to any reserves [(other
than the reserves specified in section
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80HHD [or sub-section (1) of section
33AC])], by whatever name called; or
(c) the amount or amounts set aside to
provisions made for meeting liabilities, other
than ascertained liabilities; or
(d) the amount by way of provision for losses of
subsidiary companies; or
(e) the amount or amounts of dividends paid or
proposed; or
(f) the amount or amounts of expenditure
relatable to any income to which any of the
provisions of Chapter III [applies; or]
(g) the amount withdrawn from the reserve
account under Section 80HHD, where it has
been utilised for any purpose other than
those referred to in sub-section (4) of that
section; or
(h) the amount credited to the reserve account
under Section 80HHD, to the extent that
amount has not been utilised within the
period specified in sub-section (4) of that
section;
[(ha) the amount deemed to be the profits under
sub-section (3) of section 33AC;]
[If any amount referred to in clauses (a) to (f) is
debited or, as the case may be, the amount referred to
in clauses (g) and (h) is not credited] to the profit and
loss account, and as reduced by
(i) the amount withdrawn from reserves [(other
than the reserves specified in section
80HHD)] or provisions, if any such amount
is credited to the [profit and loss account :
Provided that, where this section is
applicable to an assessee in any previous
year (including the relevant previous year),
the amount withdrawn from reserves created
or provisions made in a previous year
relevant to the assessment year commencing
on or after the 1st day of April, 1988 shall
not be reduced from the book profit unless
the book profit of such year has been
increased by those reserves or provisions
(out of which the said amount was
withdrawn) under this Explanation; or ]
(i) the amount of income to which any of the
provisions of Chapter III applies, if any such
amount is credited to the profit and loss
account; or
(ii) the amounts [as arrived at after increasing
the net profit by the amounts referred to in
clauses (a) to (f) and reducing the net profit
by the amounts referred to in clauses (i) and
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(ii)] attributable to the business, the profits
from which are eligible for deduction under
section 80HHC or section 80HHD; so,
however, that such amounts are computed in
the manner specified in sub-section (3) or
sub-section (3A) of section 80HHC or sub-
section (3) of section 80HHD, as the case
may be; or]
[(iv)] the amount of the loss or the amount of
depreciation which would be required to be
set off against the profit of the relevant
previous year as if the provisions of clause
(b) of the first proviso to sub-section (1) of
section 205 of the Companies Act, 1956 (1
of 1956), are applicable.
(2) Nothing contained in sub-section (1) shall
affect the determination of the amounts in
relation to the relevant previous year to be
carried forward to the subsequent year or
years under the provisions of sub-section (2)
of section 32 or sub-section (3) of section
32A or clause (ii) of sub-section (1) of
section 72 or section 73 or section 74 or sub-
section (3) of section 74A or sub-section (3)
of section 80J.]"
For deciding this issue, it is necessary for us to examine
the object of introducing Section 115-J in the IT Act which
can be easily deduced from the Budget Speech of the then
Hon. Finance Minister of India made in the Parliament while
introducing the said Section which is as follows:
"It is only fair and proper that the
prosperous should pay at least some tax. The
phenomenon of so-called "zero-tax" highly
profitable companies deserves attention. In
1983, a new section 80VVA was inserted in
the Act so that all profitable companies pay
some tax. This does not seem to have helped
and is being withdrawn. I now propose to
introduce a provision whereby every
company will to have to pay a "minimum
corporate tax" on the profits declared by it in
its own accounts. Under this new provision,
a company will pay tax on at least 30% of its
book profit. In other words, a domestic
widely held company will pay tax of at least
15% of its book profit. This measure will
yield a revenue gain of approximately Rs.75
crores."
The above Speech shows that the income tax authorities
were unable to bring certain companies within the net of
income-tax because these companies were adjusting their
accounts in such a manner as to attract no tax or very little
tax. It is with a view to bring such of these companies within
the tax net that Section 115-J was introduced in the IT Act
with a deeming provision which makes the company liable to
pay tax on at least 30% of its book profits as shown in its
own account. For the said purpose, Section 115-J makes the
income reflected in the companies books of accounts as the
deemed income for the purpose of assessing the tax. If we
examine the said provision in the above background, we
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notice that the use of the words "in accordance with the
provisions of Parts II and III of Schedule VI to the
Companies Act" was made for the limited purpose of
empowering the assessing authority to rely upon the
authentic statement of accounts of the company. While so
looking into the accounts of the company, an assessing
officer under the IT Act has to accept the authenticity of the
accounts with reference to the provisions of the Companies
Act which obligates the company to maintain its account in a
manner provided by the Companies Act and the same to be
scrutinised and certified by statutory auditors and will have to
be approved by the company in its General Meeting and
thereafter to be filed before the Registrar of Companies who
has a statutory obligation also to examine and satisfy that the
accounts of the company are maintained in accordance with
the requirements of the Companies Act. Inspite of all these
procedures contemplated under the provisions of the
Companies Act, we find it difficult to accept the argument of
the Revenue that it is still open to the assessing officer to re-
scrutinise this account and satisfy himself that these accounts
have been maintained in accordance with the provisions of
the Companies Act. In our opinion, reliance placed by the
Revenue on sub-section (1A) of Section 115-J of the IT Act
in support of the above contention is misplaced. Sub-section
(1A) of Section 115-J does not empower the assessing officer
to embark upon a fresh inquiry in regard to the entries made
in the books of account of the company. The said sub-
section, as a matter of fact, mandates the company to
maintain its account in accordance with the requirements of
the Companies Act which mandate, according to us, is bodily
lifted from the Companies Act into the IT Act for the limited
purpose of making the said account so maintained as a basis
for computing the company’s income for levy of income-tax.
Beyond that, we do not think that the said sub-section
empowers the authority under the Income-tax Act to probe
into the accounts accepted by the authorities under the
Companies Act. If the statute mandates that income prepared
in accordance with the Companies Act shall be deemed
income for the purpose of Section 115-J of the Act, then it
should be that income which is acceptable to the authorities
under the Companies Act. There can not be two incomes one
for the purpose of Companies Act and another for the
purpose of income tax both maintained under the same Act.
If the legislature intended the assessing officer to reassess the
company’s income, then it would have stated in Section 115-
J that "income of the company as accepted by the assessing
officer". In the absence of the same and on the language of
Section 115-J, it will have to held that view taken by the
tribunal is correct and the High Court has erred in reversing
the said view of the tribunal.
Therefore, we are of the opinion, the assessing officer
while computing the income under Section 115-J has only the
power of examining whether the books of account are
certified by the authorities under the Companies Act as
having been properly maintained in accordance with the
Companies Act. The assessing officer thereafter has the
limited power of making increases and reductions as
provided for in the Explanation to the said section. To put it
differently, the assessing officer does not have the
jurisdiction to go behind the net profit shown in the profit and
loss account except to the extent provided in the Explanation
to Section 115-J.
The second question framed by us hereinabove arises
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for our consideration in the following factual background.
The assessee company in its books of account had shown
certain sums of money representing as "dividend" from units
of the UTI and had included the said sums in the computation
of its profit as an income from "eligible business". It also
claims that out of such income from "eligible business" it had
purchased certain new machineries for its factory because of
which it claimed a deduction of 20% of the said income as
provided in Section 32AB of the IT Act. This claim of the
company has been allowed by the tribunal and confirmed by
the High Court. The argument of the Revenue in this regard
is that the income received by the assessee company from its
investment in the UTI has been declared by the company
itself as an "income from other sources" which head of
income is different from income from "profits and gains of
business or profession" and under Section 32AB, income
from business alone is entitled for the benefit of that Section.
The assessee contends that its income from sale and purchase
of units of the UTI is part of its regular business and that it
has held these units as stock-in-trade and has been doing the
business of buying and selling the same. The assessee also
contends that its income from this business of investment in
the units of the UTI and its business of manufacture and sale
of tyres are pooled together in a common account of funds
which is managed by one common Management. It is also the
submission of the assessee that these two business, namely,
the business of buying and selling units of the UTI and the
manufacture and sale of tyres are so intertwined and
interlaced that the same cannot be separated and treated
independently, therefore, this income from the UTI being
part of its business income, it is entitled to claim the benefit
of Section 32AB.
A perusal of Section 32AB, as it stood at the relevant
time, shows that if an assessee has a total income including
the income chargeable to tax under the head "profits and
gains of business or profession" and if the income from such
business is derived from an "eligible business" and if the
assessee has out of such income utilised any amount during
the previous year for purchase of new plant or machinery
then it is entitled to a set off of a sum equal to 20% of the
profit of such eligible business as computed in the accounts
of the assessee which account has been audited in accordance
with sub-section (5) of Section 32AB.
The dispute in the present case is in regard to the
question whether the assessee’s investment in the UTI is
business, and if so, is it a business which qualifies to be an
"eligible business" under Section 32AB ? In regard to the
first aspect, we must note that the tribunal as a question of
fact based on material on record has come to the conclusion
that the investment in the UTI by the assessee company is in
the course of its business and its business of manufacture and
sale of tyres and sale and purchase of units of the UTI are
common in nature and both the businesses are intertwined
and interlaced. This finding is accepted by the High Court
also. We also find that this business of the assessee company
of buying and selling of units is a business as contemplated
under Section 32AB of the Act. The question then is: is it an
eligible business under the said section ? The term "eligible
business" is defined under sub-section (2) of Section 32AB.
As per that definition, all business of an assessee company
will be an eligible business unless it falls under the type of
business enumerated in sub-clauses (a) and (b) of Section
32AB(2). It is nobody’s case that this business of the assessee
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company is one of those businesses which fall under business
enumerated in clauses (a) and (b) of sub-section (2) of
Section 32AB. Therefore, there is no doubt that the business
of the assessee company is an eligible business. The fact that
it is shown under a different head of income would not
deprive the company of its benefit under Section 32AB so
long as it is held that the investment in the units of the UTI
by the assessee company is in the course of its "eligible
business". Therefore, in our opinion, the dividend income
earned by the assessee company from its investment in the
UTI should be included in computing the profits of eligible
business under Section 32AB of the Act.
The last point for our consideration is: whether buying
and selling of units by the assessee company can be treated
as a speculative business ? For this purpose, the Revenue
argues that the units purchased by the assessee company from
the UTI are shares, therefore, as per Explanation to Section
73 of the Act, the said business of purchasing and selling of
shares will have to be treated as a business of speculation.
The Revenue in support of this argument, relies on Section
32(3) of the UTI Act which reads as follows :
"(3) Subject to the foregoing sub-sections, for the
purposes of the Income-tax Act, 1961, --
(a) any distribution of income received by a
unitholder from the Trust shall be deemed to
be his income by way of dividends; and
(b) the Trust shall be deemed to be a company."
Relying on the above provision of the UTI Act, the
Revenue contends that if the UTI is a company and income
from its units is dividend then ipso facto the units will have
to be shares, therefore, the business of purchase and sale of
units conducted by the assessee company will have to be
deemed to be a business in shares which business, according
to the Revenue, attracts Explanation to Section 73. On this
basis, it is contended that the business of purchase and sale of
units by the assessee company amounts to a business of
speculation. Both the tribunal and the High Court have
considered this argument as also the effect of Section 32(3)
of the UTI Act and have come to the conclusion that the
provision of the said Act is limited for the purpose of
assessment of dividend income under the Act, and for
deduction of tax at source. They have held that the legal
fiction created by Section 32(3) of the UTI Act cannot be
carried any further. We have examined the provisions of the
UTI Act and we are of the opinion that even though the said
Section creates a fiction to make the UTI as a deemed
company and distribution of income received by the unit
holder as a deemed dividend, by virtue of these deemed
provisions, it cannot be said that it also makes the unit of the
UTI a deemed share. In our opinion, a deeming provision of
this nature as found in Section 32(3) should be applied for the
purpose for which the said deeming provision is specifically
enacted, which in the present case is confined only to
deeming the UTI as a company and deeming the income
from the units as a dividend. If as a matter of fact, the
Legislature had contemplated making the units as also a
deemed share then it would have stated so. In the absence of
any such specific deeming in regard to the units as shares it
would be erroneous to extend the provisions of Section 32(3)
of the UTI Act to the units of UTI for the purpose of holding
that the unit is a share. For these reasons, we are in
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agreement with the finding of the High Court on this point
also.
For the reasons stated above, we allow C.A.
No.6100/98 preferred by the assessee to the extent of our
finding in the first point formulated by us but without costs.
Based on our finding in regard to point Nos.2 and 3
formulated by us hereinabove, C.A. Nos.2518-19/99 are
dismissed with costs.
..CJI.
J.
(N.Santosh Hegde)
J.
May 2, 2002. (D.M.Dharmadhikari)