2002 (12) TMI 4 - SC - Income Tax

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 (tax on) 30 % of its book profits in terms of s. 115J - revenue s contention that deductions not been actually allowed as claimed by the appellant the assessee would not have been liable to pay only the tax on the book profit but tax on the actual income is acceptable - held that there is no notional but actual deduction

Summary

Issues Involved:
1. Interpretation of Section 115J of the Income-tax Act, 1961.
2. Determination of whether permissible deductions under the Act are considered "actually allowed" when tax is imposed on 30% of book profits under Section 115J.
3. Treatment of unabsorbed depreciation, investment allowance, and business losses under Section 115J.

Issue-wise Detailed Analysis:

1. Interpretation of Section 115J of the Income-tax Act, 1961:
Section 115J was introduced by the Finance Act, 1987, effective from the assessment year 1988-89 to 1990-91, under Chapter XII-B titled "Special provisions relating to certain companies." The section mandates that if the total income of a company, computed under the Act, is less than 30% of its book profit, the total income chargeable to tax would be deemed to be 30% of such book profit. The section includes a non-obstante clause, indicating its application notwithstanding other provisions of the Act.

2. Determination of whether permissible deductions under the Act are considered "actually allowed" when tax is imposed on 30% of book profits under Section 115J:
The Supreme Court examined whether deductions permissible under the Act were considered "actually allowed" when the assessee was liable to pay tax on 30% of its book profits. The Tribunal had held that depreciation considered for calculating taxable income should be deemed actually allowed and adjusted in the written down value of assets for subsequent years. The High Court upheld this reasoning, emphasizing that the deductions were a necessary ingredient for applying the fictional total income under Section 115J. The Supreme Court affirmed this view, stating that deductions are taken into account when computing income under the Act, and the resultant income determines whether the assessee falls under the purview of Section 115J.

3. Treatment of unabsorbed depreciation, investment allowance, and business losses under Section 115J:
Section 115J(2) preserves the right to carry forward unabsorbed depreciation, investment allowance, and business losses to subsequent years. The Supreme Court clarified that Section 115J does not create new rights but allows the carry-forward of unabsorbed deductions as per the existing provisions of the Act. The court highlighted that the purpose of Section 115J was to ensure that profitable companies pay a minimum tax, thereby addressing the issue of "zero-tax" companies that avoided tax through various deductions.

Conclusion:
The Supreme Court confirmed the High Court's decision, holding that deductions claimed by assessees under the Act are considered actually allowed when determining taxable income under Section 115J. The court emphasized that Section 115J aims to tax companies making substantial profits but declaring minimal taxable income due to allowable deductions. The appeals were dismissed with costs, affirming the interpretation that deductions are integral to computing income under Section 115J and can be carried forward as per the Act's provisions.