2013 (7) TMI 323 - HC - Income Tax

Constitutionality of Section 115J and 115JA - Minimum Alerter Tax (MAT) - Whether, these sections arbitrary and violative of Article 14 of the Constitution of India - Held that - Introduction of a minimum tax on profit making companies was considered necessary as certain companies were declaring high profits but not paying any taxes on account of deductions available under the normal computation provisions of the Act including set off of carried forward depreciation - It is settled law that Article 14 does not forbid reasonable classification and the question whether any classification is reasonable has to be tested on the basis of whether the same bears a reasonable nexus with the object of the statute. Section 115JA of the Act was to ensure that all corporate assessees pay tax at least on 30% of the book profits declared by them. In this respect, section 115JA of the Act affected only those companies who declared large profits, however, as per the normal provisions of the Act, were liable to pay tax less than that as calculated on 30% of the declared profits. Treating such companies as a separate class has a direct nexus with the object of ensuring that all corporate assessees having profits pay at least the minimum specified tax - Upon a plain reading of section 115J of the Act, the income calculated on the basis of book profits squarely falls within the definition of total income as defined under the Act. Section 115JA only provides for an alternate method for calculating tax and thus, provides a measure for purposes of levying tax. The same cannot be confused with the subject matter of the levy which continues to be tax on income - Section 115J of the Act only creates a legal fiction to supplant the measure of total income which is chargeable to tax. The non obstante clause indicates that the provisions of 115JA of the Act would override the other provisions of the Act for computation of taxable income in certain cases falling within the sweep of section 115JA. Section 115JA of the Act is a special provision to calculate taxable income in certain cases. The levy of income tax is under Section 4 of the Act, which is the charging section. Section 115J of the Act only creates a legal fiction to supplant the measure of total income which is chargeable to tax. Thus, indisputably, tax as computed on the basis of Section 115J of the Act is a tax on income. Provisions of Sections 115JA and 115JAA of the Act are neither arbitrary nor unreasonable. Following decisions of ITO v. N. Takin Roy Rymbai 1976 (2) TMI 2 - SUPREME Court , East Indian Tobacco Co. v. State of Andhra Pradesh 1962 (4) TMI 57 - SUPREME COURT OF INDIA , Budhan Choudhry v. State of Bihar 1954 (12) TMI 17 - SUPREME COURT , National Thermal Power Corporation Ltd v. Union of India & Ors. 1991 (4) TMI 97 - DELHI High Court and State of West Bengal v. Kesoram Industries Limited 2004 (1) TMI 71 - SUPREME Court - Decided against assessee.

Summary

Issues Involved:
1. Constitutionality of Section 115JA of the Income Tax Act, 1961.
2. Constitutionality of Section 115JAA of the Income Tax Act, 1961.
3. Violation of Articles 14, 19(1)(g), 265, and 300A of the Constitution of India.
4. Classification and discrimination under Article 14.
5. Nature and measure of tax under Section 115JA.

Detailed Analysis:

1. Constitutionality of Section 115JA:
The petitioner challenged Section 115JA, which mandates a minimum tax on companies earning substantial profits but not paying taxes due to deductions like unabsorbed depreciation. The petitioner argued that this provision is ultra vires Article 265 and Entry 82 of List I of Schedule VII of the Constitution, as it does not compute tax on income as per the Act. The court held that Section 115JA provides an alternate method to ensure profitable companies pay tax on at least 30% of their book profits. This provision is not arbitrary or discriminatory and does not violate Article 14, as it treats all companies within its scope equally. The court also noted that the legislative intent was to tax "zero-tax" companies, ensuring they contribute to the tax net.

2. Constitutionality of Section 115JAA:
Section 115JAA, which allows credit for tax paid under Section 115JA to be set off against future tax liabilities, was also challenged. The petitioner argued that this amounts to a forcible, interest-free deposit. The court explained that Section 115JAA is a beneficial provision allowing companies to claim credit for taxes paid under Section 115JA in subsequent years, provided they have taxable income. This scheme does not render Section 115JA unconstitutional or arbitrary.

3. Violation of Constitutional Articles:
The petitioner contended that Section 115JA violates Article 265, which mandates that no tax shall be levied or collected except by authority of law. The court clarified that Parliament has the competence to enact laws imposing tax on income, and Section 115JA, being an alternate method of computing taxable income, is within this authority. The court also rejected the argument that book profits fall outside the definitions of "income" and "total income" under Sections 2(24) and 2(45) of the Act, respectively. Section 115JA deems 30% of book profits as total income chargeable to tax, fitting within these definitions.

4. Classification and Discrimination:
The petitioner argued that Section 115JA discriminates against companies by treating those with taxable income below 30% of book profits differently. The court held that reasonable classification is permissible under Article 14 if it has a rational nexus with the statute's objective. Section 115JA aims to ensure that profitable companies pay a minimum tax, which is a reasonable objective. The court cited precedents affirming that fiscal legislation enjoys greater flexibility in classification, provided it treats all entities within the class equally.

5. Nature and Measure of Tax:
The court addressed the distinction between the nature of tax and its measure. Section 115JA provides a measure for calculating taxable income based on book profits, which does not alter the nature of the tax as income tax. The court cited the Supreme Court's ruling in State of West Bengal v. Kesoram Industries Limited, emphasizing that the measure of tax should not be confused with its nature. The non obstante clause in Section 115JA indicates it overrides other provisions for computing taxable income, but the levy remains a tax on income under Section 4 of the Act.

Conclusion:
The court held that Sections 115JA and 115JAA of the Income Tax Act are neither arbitrary nor unreasonable and are not ultra vires the Constitution of India. The petition was dismissed, and parties were left to bear their own costs.