1999 (4) TMI 5 - SC - Income Tax

Book Profits - Held that term loss as appearing in section 205(1), first proviso, clause (b), of the Companies Act, 1956, read with section 115J of the Income-tax Act, 1961, means including depreciation - held that the word loss signifies the amount arrived at after taking into account the amount of depreciation and it has to be so read and understood in the context of section 115J of the Income-tax Act, 1961.

Issues Involved:
1. Interpretation of the term "loss" in section 205(1), first proviso, clause (b), of the Companies Act, 1956, read with section 115J of the Income-tax Act, 1961.
2. Computation of book profit under section 115J of the Income-tax Act, 1961.
3. Applicability of unabsorbed depreciation in the computation of book profit.
4. Legislative intent and purpose behind section 115J of the Income-tax Act, 1961.
5. Use of external aids, such as the Finance Minister's speech, for statutory interpretation.

Detailed Analysis:

Interpretation of the Term "Loss":
The primary issue is whether the term "loss" in section 205(1), first proviso, clause (b) of the Companies Act, 1956, read with section 115J of the Income-tax Act, 1961, includes depreciation. The High Court held that "loss" does not mean "including depreciation." However, the Supreme Court disagreed, stating that the term "loss" should be understood as the amount arrived at after taking into account the depreciation. This interpretation aligns with the established corporate practice and the commercial sense of the term "loss," which includes depreciation.

Computation of Book Profit:
The Supreme Court clarified that for the computation of book profit under section 115J of the Income-tax Act, the term "loss" should be read as including depreciation. This ensures that the computation is consistent with the provisions of section 205(1), first proviso, clause (b) of the Companies Act. The Court provided examples to demonstrate how the formula prescribed in this clause makes sense only when "loss" includes depreciation.

Applicability of Unabsorbed Depreciation:
The Court emphasized that unabsorbed depreciation should be allowed to be set off against the current year's profit for determining the book profit under section 115J. This interpretation is consistent with the legislative intent and the object sought to be achieved by enacting section 115J, which aims to levy a minimum tax on prosperous companies declaring dividends but paying no income tax.

Legislative Intent and Purpose:
The Supreme Court referred to the Finance Minister's speech during the introduction of section 115J to understand the legislative intent. The speech indicated that the provision was introduced to ensure that profitable companies pay a minimum tax. The Minister also acknowledged the hardship faced by new projects and sick companies, leading to an amendment allowing the set-off of past losses and unabsorbed depreciation.

Use of External Aids for Interpretation:
The Court noted the modern trend of using external aids, such as the Finance Minister's speech, for statutory interpretation. This approach helps in ascertaining the object and purpose of the legislation. The Court cited the rule laid down in Pepper v. Hart and the distinction made in Indian cases between using the Minister's speech for finding out the mischief to be remedied and the legislative intent.

Conclusion:
The Supreme Court allowed the appeals filed by the assessees, setting aside the High Court's order. The Court held that the term "loss" in section 205(1), first proviso, clause (b) of the Companies Act, 1956, read with section 115J of the Income-tax Act, 1961, includes depreciation. This interpretation ensures that the computation of book profit is consistent with the legislative intent and the object of section 115J. The appeals filed by the Revenue were dismissed.

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