Ssidc Ltd. Vs. Commissioner of Income Tax, Bangalore  Insc 514 (3
Pal & B.N. Srikrishna. Ruma Pal, J.
Civil Appeal Nos. 824/2000, 825-826/2000 2715-2716/2000, 3546-3547/2001
these appeals are disposed of by this common judgment.
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').
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
(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.
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.
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 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.
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
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
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?
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 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.
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.
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.
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.
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
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.
constitutional validity of section 115-J of the Act is not in dispute before
us. The only issue is its interpretation.
115-J(1) commences with a non obstante clause.
read, it provides for two stages:
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;
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.
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.
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.
construction of sub sections (1) and (2) section 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
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 .
gives explanatory notes on the provisions relating to direct tax in the Finance
Act. With reference to section 115J, it was said:
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.
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".
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 enacting the provision". The
reasoning appears to us to be unexceptionable.
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.
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:
the case of assets acquired in the previous year, the actual cost to the assessee;
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.
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:
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." 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.
the reasons aforesaid, we have no hesitation in confirming the decision of the
High Court and dismissing these appeals with costs.