Full Judgment Text
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CASE NO.:
Appeal (civil) 823 of 2000
PETITIONER:
Karnataka Small Scale Industries Development Corporation Ltd.
RESPONDENT:
Commissioner of Income Tax, Bangalore
DATE OF JUDGMENT: 03/12/2002
BENCH:
Ruma Pal & B.N. Srikrishna.
JUDGMENT:
J U D G M E N T
With
Civil Appeal Nos. 824/2000, 825-826/2000
2715-2716/2000, 3546-3547/2001
RUMA PAL, J.
All these appeals are disposed of by this common
judgment.
The assessees who are in appeal before us are
companies who have been subjected to imposition of tax on
30% of their book profits in accordance with section 115J(1) of
the Income Tax Act, 1961 (referred to as the ’Act’).
Section 115J is in Chapter XII-B of the Act which is
entitled ’Special Provisions Relating to Certain Companies’. It
was inserted by the Finance Act, 1987 with effect from the
Assessment Year 1988-89 and remained in operation till the
Assessment Year 1990-91. The relevant extract of section
115-J reads as follows:
"115J. (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 asseseee, 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.
(2) Nothing contained in sub-section (1)
shall affect the determination of the amounts
in relation to the relevant previous year to be
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carried forward to the subsequent year or
years under the provisions of sub-section (2)
of Section 32 or sub-section (3) of Section
32-A 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."
The question to be determined in all these appeals is
whether the deductions which are permissible under the
provisions of the Act can be considered to have been actually
allowed when the assessee has been made liable to pay 30 per
cent of its book profits in terms of section 115-J of the Act.
The Income Tax Appellate Tribunal, Bangalore Bench
held that in determining the total income of the assessee under
other provisions of the Act, depreciation actually considered for
calculating the taxable income shall be the depreciation which
is deemed to have been actually allowed. According to the
Tribunal, this depreciation has to be considered while
determining the written down value of the assets for the
subsequent assessment year even though the taxable income
of the assessee was determined with reference to book profit
pursuant to section 115-J(1) of the Act. It also held that the
scheme for levying tax by considering 30% of the book profit
under section 115J(1) to be the deemed total income, as "an
artificial process super-imposed on the regular process of
determination of the total income of the assessee in the usual
manner".
The Tribunal at the instance of the assessee formulated
the following questions under section 256(1) of the Act and
referred the same to the High Court for its opinion:
"1. Whether on the facts and in the
circumstances of the case, the Tribunal was
right in holding that the amounts of business
loss, unabsorbed depreciation, unabsorbed
investment allowance etc., as at the beginning
of the accounting year are required to be
adjusted and set off to the extent of such
brought forward business loss, unabsorbed
depreciation etc., would have been adjusted
and set off had the assessee been assessed
to tax in the regular way in accordance with
the provisions of Sec.28 to 43 of the Income
Tax Act, 1961 and not by way of application of
the provisions of Sec.115J(1) and that the
resultant amounts of losses, unabsorbed
depreciation, unabsorbed investment
allowance etc. only will be required to be
carried forward to the next year?
2. Whether, on the facts and in the
circumstances of the case, the Tribunal was
right in holding that the written down values of
the assets will have to be adjusted by
deducting therefrom the amounts of
depreciation which would have been allowed
on such assets in the regular method of
assessment in accordance with the provisions
of Section 28 to 43 of the Income Tax Act,
1961 without applying the provisions of
Section 115J(1), and the resultant amounts of
written down values will only have to be
carried forward to the next year."
Similar orders were passed by the Tribunal in the case of
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other appellants. The High Court by a common order and
judgment upheld the reasoning of the Tribunal and answered
the references in favour of the Revenue and against the
assessees.
According to Mr. S. Ganesh, learned senior counsel
appearing on behalf of one of the appellants, an assessee-
company which was otherwise entitled to various deductions
under the provisions of the Act from its total income, in
computing its total income, was liable under section 115-J to
pay tax of 30 per cent of the company’s book profit irrespective
of the actual deductions claimed by it for the period when
section 115-J was in operation. It is submitted that in such
circumstances it cannot be said that the benefits of deduction
which the assessee had claimed had been actually allowed
and, therefore, the assessee/appellant should have been
permitted to carry forward the unabsorbed investment
allowance or depreciation claimed by it for the relevant
previous year, under the provisions of sub-section (2) of section
115-J read with sections 32-A and 32-A (3)(iii). Reliance was
placed on section 43(6) which defines ’written down value’ as
meaning the actual cost of the asset less deprecation actually
allowed. It is submitted that therefore in computing the income
for the next assessment year the assessee who had paid 30
per cent of the book profit in the preceding assessment year
could claim to adjust the depreciation and investment
allowance since the depreciation and the investment allowance
claimed in the preceding year had not been actually allowed.
Reliance has been placed on the decisions reported in
Commissioner of Income Tax, Bombay City I v. Dharampur
Leather Co. Ltd. 60 ITR 165 and Madeva Upendra Sinai v.
Union of India and Others 98 ITR 209 in support of this
submission. According to the Mr. Ganesh, the entire
investment allowance and unabsorbed depreciation as on April
1998 remained intact and was not written off or obliterated by
computation of income of 30 per cent of the book profit under
section 115-J.
Mr. Dhruv Mehta, learned counsel for another
appellant/assessee has adopted these arguments and has
further submitted that the fiction of the assessable income
under section 115-J could not be extended to include the
fictional deductions. It was stated that where deductions were
sought to be adjusted, this has been expressly provided for, as
for example under section 44 AD, sub-section (2) & (3) and
section 44 AF, sub-sections (2) & (3). Reference has been
made to the decisions of this Court in Commissioner of
Income Tax, Kanpur V. Mother India Refrigeration
Industries 1985 (4) SCC 1 (para 10) and Mancheri
Puthusseri Ahmed V. Kuthiravattam Estate Receiver 1996
(6) SCC 185 to contend that a statutory fiction must be limited
strictly to the purpose for which it is introduced. In any event, it
is submitted by learned counsel that if there were any doubt in
the interpretation of the provisions, the doubt must be resolved
in favour of the assessee on the basis of the principles
enunciated in Commissioner of Income Tax, Bangalore V.
A.H. Gotla 56 ITR 323.
Mr.R.P. Bhat, learned senior counsel appearing on behalf
of the Revenue has submitted that section 115-J was aimed at
those companies which were in fact profit making but submitted
’nil’ assessments of their total income by virtue of the
deductions permitted under the Act. In the case of such "zero-
tax companies", the intention of section 115-J was to levy tax
on such companies by fixing a notional asssessable income
which was 30 per cent of the book profit. Learned counsel has
relied upon the reasoning of the decision of the Division Bench
of the Andhra Pradesh High Court in Suryalatha Spg. Mills
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Ltd. V. Union of India (223 ITR 713) and has submitted that
the assessee cannot under section 115-J (2), be permitted to
carry forward those deductions which had already been claimed
and allowed by the Department in arriving at the zero
assessment figure. According to Mr. Bhat, had the deductions
not been actually allowed as claimed by the appellant, then the
assessee would not have been liable to pay only the tax on the
book profit but tax on the actual income.
The constitutional validity of section 115-J of the Act is
not in dispute before us. The only issue is its interpretation.
Section 115-J(1) commences with a non obstante clause.
Plainly read, it provides for two stages:
(a) computation of income of the assessee under the
Act in respect of any previous year relevant to the
assessment year commencing on or after 1st April
1988 and before 1st July 1991;
(b) If the income as computed under the Act in respect
of the relevant previous year is less than 30 per
cent of its book profit, then the deemed total
income of the assessee chargeable to tax for the
relevant previous year would be equal to 30 per
cent of the book profit.
The first stage referred to above envisages computation
of income under the Act, that is, after taking into consideration
all deductions allowable under the Act. It is only after the
deductions are given effect to, and if the resultant income is
less than 30 per cent of the book profit, that the assessee’s
total income would be deemed to have a notional income fixed
at 30 per cent of its book profit. It may be that the assessees
are not required to pay tax on the figure of the assessable
income arrived at after deducting the amounts permissible
under the Act. However, it cannot be said that therefore the
deductions are not taken into account. If the deductions had
not in fact been allowed then the assessee would not have had
an assessable income lesser than 30 per cent of its book profit,
entitling it to pay tax only on 30 per cent of its book profit. In
deeming the total income to be 30 per cent of the book profit,
the deductions claimed are not ignored as contended by the
appellants but are a necessary ingredient of the formula for
applying the fictional total income. The decisions cited in the
context of the operation of statutory fictions are not apposite as
there is no notional or fictional but actual deduction. Once the
deductions are taken into consideration and the assessee is put
into the category of those companies covered by section
115J(1) only then is the assessee required to pay on a notional
income of 30 per cent of its book profits.
Had sections 115J not been introduced, the assessee
would have been entitled under the provisions of section 32(2),
32(A)(3), 72(I) (ii), 73, 74, 74A(3) and 80(J)(3) to carry forward
only the unabsorbed depreciation allowance under section 32,
investment allowance under section 32-A, losses under
sections 72, 72A, 73, 74 and permissible deductions under
section 80J to the following assessment year to be set off
against the profits and gains of that assessment year. All that
section 115-J(2) does is to preserve this right viz. to carry
forward the balance of the unabsorbed deductions in the
relevant previous year to the next assessment year. Section
115-J does create any right nor does it serve to allow all the
deductions taken into consideration for determining whether the
total income should be quantified under section 115-J (1), to be
carried forward under sub-section 2 of section 115-J. It allows
only the unabsorbed losses, depreciation, investment
allowance etc. which otherwise could have been carried
forward, to be carried forward.
This construction of sub sections (1) and (2) section
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115J is in keeping with the avowed purpose for which Chapter
XII-B was introduced in the Act by the Finance Act, 1987. This
was stated by the Finance Minister in his budget speech in the
following manner:
"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 per cent,
of its book profit This measure will yield a
revenue gain of approximately Rs.75 crores."
In addition, a contemporaneous exposition of the purport
of section 115J is contained in Circular No. 495 dated 22nd
September 1987 issued by the Central Board of Direct Taxes .
The Circular gives explanatory notes on the provisions relating
to direct tax in the Finance Act. With reference to section 115J,
it was said:
" Section 115J, therefore, involves two
processes. Firstly, an assessing authority has
to determine the income of the company under
the provisions of the Income-tax Act. Secondly,
the book profit is to be worked out in
accordance with the Explanation to section
115J(1) and it is to be seen whether the income
determined under the first process is less than
30 per cent of the book profit. Section 115J
would be invoked if the income determined
under the first process is less than 30 percent
of the book profit. The Explanation to sub-
section (1) of section 115J gives the definition
of the "book profit" by incorporating the
requirement of section 205 of the Companies
Act in the computation of the book profit.
Brought forward losses or unabsorbed
depreciation whichever is less would be
reduced in arriving at the book profits. Sub-
section (2), however, provides that the
application of this provision would not affect the
carry forward of unabsorbed depreciation,
unabsorbed investment allowance, business
losses to the extent not set off, and deduction
under section 80J, to the extent not set off as
computed under the Income-tax Act".
The Division Bench of the Andhra Pradesh High Court
in Suryalatha Spg. Mills Ltd. (supra) had construed section
115J in favour of the Revenue inter alia because: "the very
object of the provision of section 115J is to tax such companies
which are making huge profits and also declaring substantial
dividends, but are managing their affairs in such a way as to
avoid payment of income tax, as a result of various tax
concessions and incentives and for that purpose the taxable
income is determined under sub-section (1) of section 115J, if
any loss equal to the income thus determined is allowed to be
adjusted, then that would frustrate and nullify the very object of
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enacting the provision". The reasoning appears to us to be
unexceptionable.
In Lallcherra Tea Co. (O) Ltd. V. Commissioner of
Income Tax 239 ITR 611 relied upon by the appellant, the
Guwahati High Court was considering a case of an assessee-
company which had filed a return in which the total income
computed was less than 30 per cent of its book profit. After
computing its book profit, in terms of section 115-J (1), a sum of
Rs.74,477/- was deemed to be the total income chargeable to
tax for the assessment year, namely, 1987-88. In the
assessment year 1988-89, the company sought to deduct the
sum of Rs.74,477/- rounded off to Rs.74,450/- from its total
income. The Revenue opposed this. The submission of the
assessee was that the tax would not have been demanded
against the amount which was adjusted. Upsetting the finding
of the Tribunal, the Court held in favour of the assessee on the
basis of a hypothetical example which, in our view, proceeds on
a complete mis-appreciation of section 115-J.
The decision of this Court in Madeva Upendra Sinai V.
Union of India (supra) related to the constitutional validity of
the Taxation Laws (Extension to Union Territories)(Removal of
Difficulties) Order No. 2 of 1970 by which the provisions of the
Act were extended with certain amendments to the Union
Territories of Goa, Daman and Diu w.e.f. 1st April 1963. The
decision turned on the wording of section 43(6) of the 1961 Act
which defines ’written down value’ in so far as it is relevant:
(a) in the case of assets acquired in the
previous year, the actual cost to the
assessee;
(b) in the case of assets acquired before
the previous year, the actual cost to
the assessee less all depreciation
actually allowed to him under this
Act, or under the Indian Income Tax
Act, 1922 (11 of 1922), or any Act
repealed by that Act, or under any
executive orders issued when the
Indian Income-tax Act, 1886 (2 of
1886) was in force.
Under the laws in force in the former Portuguese territory,
no allowance in the nature of depreciation was permitted in
computing the gross income. According to the assessees since
there was no depreciation allowed under the Portuguese law in
the said relevant previous year, it could not be said to have
been actually allowed and that, therefore, they were entitled to
adjust the entire depreciation in the accounting year. This was
more than what was available to assessee who had all along
been covered by the 1961 Act. Parity amongst the assessees
was sought to be brought about by the impugned Order by
providing notional depreciation in prior years for the ’new
assessee’. This was held to be unconstitutional. In this
context, the Court held that:
"the word ’depreciation actually
allowed’ in section 43(6)(b) connote
depreciation that has actually been
taken into account and given effect to by
the income tax authorities in the
computation of the profits and gains of
the business in assessing income tax for
earlier years."
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Since there was no law between the date the territories
were merged in India and the date when the Income Tax Act
was extended to those territories under which the income of
those prior years could be computed, there was no question of
any depreciation being claimed, allowed or carried forward by
the assessee for any year prior to 1963. A similar decision was
taken by this Court in Commissioner of Income Tax, Bombay
City I V. Dharampur Leather Co. Ltd. (supra). Both decisions
are distinguishable since, for the reasons stated we have held
that there is no notional but actual deduction in this case.
For the reasons aforesaid, we have no hesitation in
confirming the decision of the High Court and dismissing these
appeals with costs.