Section 115J, 115JA and 115JB may be ultravirse the Constitution of India and the Income-tax Act,1961 - a study with reference to some very weekly prepared and contested cases about validity of provision for tax on book profit / minimum alternate tax (MAT) and some suggestions for tax payers and government both

[CA DEV KUMAR KOTHARI]

Relevant links and references:

The Constitution of India- particularly the preamble, articles 14 ,19 , 366, and the union List.

National Thermal Power Corporation Limited Versus Union Of India And Others 1991 (4) TMI 97 - DELHI HIGH COURT

Suryalatha Spinning Mills Limited And Another Versus Union Of India And Others 1996 (2) TMI 48 - ANDHRA PRADESH HIGH COURT

Karimtharuvi Tea Estates Ltd And Another Versus Deputy Commissioner Of Income-Tax And Others 2000 (7) TMI 11 - KERALA HIGH COURT

Synopsis:

It can be said that declared intention to collect some Minimum tax on book profit, is to collect   a provisional tax which is collected from companies showing huge profits and declaring huge dividends, but having lower taxable total income. At present Section 115JB is applicable.

In view of author very important contentions to be raised to challenge validity of MAT are that (a) the provisional tax collected u/s 115JA and 115JB which is eligible for credit in future tax liability cannot be called ‘tax’ or ‘impost’ within the meaning in the Constitution of India(COI) (b) collection of tax on Book profit or any part of book profit cannot be called tax on ‘income’ or ‘excess profit’ within the meaning of the Constitution of India. (c) In absence of mandate to prepare Profit and Loss account based on same and similar accounting policies on uniform principals and methodology, by all companies, at least for the purposes of MAT, there is discrimination amongst companies who are permitted to follow different accounting policies and methods resulting into different amount of profit even in a theoretically similar case. (e) Profit after Tax is a major decision in any financial plan, payment of MAT causes lower net cash retention and thus reduced scope to carry and expand business. By imposing MAT companies are forced to adopt policies which result into higher book profit under Companies Act and consequently higher tax by way of MAT – this leads to some restrictions on carrying business because due to such reasons one has to show lower profit to reduce MAT liability, although there is very low real income or normal income liable to tax. Therefore, the levy of tax u/s 115J, 115JA and 115JB need to be examined vis a vis the rights of citizens and powers of the central Government under the Constitution of India and also vis a vis the objects of the Income-tax Act, 1961.

With due regards to the counsels of petitioners who challenged provisions of S.115J the author feels that relevant contentions were not raised and irrelevant and vague contentions were raised. The cases seem to have been prepared and contested in great hurry and half heartedly and without proper application of mind hence validity of S.115J was upheld by Courts. The author feels that on a proper contest, the provisions of S. 115J, 115JA and 115JB can be considered as ultravirse. It is worth to note observations of the High Court which held that the  averment of the petitioner in this regard are extremely vague, to say the least. Therefore, apparently the case was not made out on sound footings.

Challenge of constitutional validity of S.115J

As per reported judgments of NTPC, a Central PSU was first to challenge constitutional validity of section 115J. The honorable judges of the High Court, before dealing with contentions raised, expressed their ‘astonishment at the fact that it is a Government corporation which is seeking to challenge the validity of an Act passed at the instance of the Government’.

Though the above astonishment of the Court is quite natural, yet it can be said that as a tax payer company, even a Central Government PSU has feeling and reasons to believe that the levy of tax on book profits of company is not reasonable and is not valid piece of legislation and it deserves to be struck down. This is further fortified from the fact that assessee / NTPC further contested the issue and preferred appeal by way of Special Leave Petition before the Supreme Court.

In this case SLP filed by assessee NTPC was admitted ref: (1991) 192 ITR (ST.) 3 the SLP was admitted on issue of virse of S.115J as applied to an electricity company.

and as per 11^th Edition of Sampath Iyengar’s law of Income-tax book PAGE 8402   VOL 5 SLP appears to be pending.

However, as per   http://courtnic.nic.in/supremecourt/qrycause.asp an appeal no. - AC 2871/1991 NTPC VS. UOI was disposed off on 03/02/1999 however, the order is not available on the website of the Supreme Court and with other known sources. The number of appeal under IT Act of NTPC should generally be as a SLP. However, the above mentioned appeal is shown to be AC no. 2871 of 1991. And as per website of the Supreme Court it relates to Subject Category : DIRECT TAXES MATTERS - AGRICULTURAL INCOME-TAX. Therefore, it may be that the case of NTPC under the Income-tax Act, 1961 is still pending but not shown in the search of the website. And the AC no. 2871 relates to some other matter. Therefore, one cannot surely say whether the SLP on issue of S.115J has been decided or not.

In the case before the High Court NTPC raised contentions as follows:

1. That S.115J is violative of articles 14 and 19 of the Constitution.
2. the section discriminates against limited companies while, in identical circumstances, other assessees like partnerships and sole proprietorships are left untouched by section 115J.
3. petitioner has to maintain its accounts according to the provisions of the Electricity Act and it is not possible for it to comply with the provisions of section 115J.
4. Central Board of Direct Taxes has taken a decision and, therefore, the appeal would be futile. This decision has been taken not by the Central Board on its own, but because the petitioner had made a representation to the Government against the applicability of section 115J and that representation ultimately went to the Board in its administrative capacity and the Board opined that depreciation has to be worked out in accordance with the provisions of section 115J.

On the above contentions the Court observed as follows:

1. The averment in this regard is extremely vague, to say the least.
2. No particulars have been given with regard to other categories of assessees which have been left out.
3. In order to make out a case under article 14, names of the other assessees, their income and other particulars should have been given.
4. Companies are not similarly situate as partnerships and sole proprietorships, etc., and, therefore, the provision of article 14, in any case, does not come into play in the present circumstances.
5. Regarding accounts and applicable law court observed that section in its applicability to petitioner , does not make it mandatory for the accounts to be maintained under the provisions of the Companies Act and there is no difficulty in making adjustments in accounts wherever necessary for the purpose of complying with the provisions of section 115J.

1. This opinion of the Board can, under no circumstances, be binding either on the Commissioner of Income-tax (Appeals) or on the Income-tax Appellate Tribunal, which are two appellate authorities or in any further reference to this court. Therefore, petitioner is not deprived of alternate remedy because of instructions issued by the Board.
2. Regarding applicability and procedures the petitioner has an alternative remedy open to it by way of an appeal, reference, etc. Therefore, Court cannot consider those aspects in Writ Petition.

In conclusion court held that “we find no substance in this petition. The petition is dismissed”.

Views of the author on petition and judgment in case of NTPC:

The author feels that the petitioner could not made out a case of provision being ultravirse and intervention by honorable Court in a Writ Petition.

Different assesses:- the difference between different kind of assesses (as per definition of person) is well known and well recognized. We all know that in case of different type of assesses different fiscal policies are adopted under various direct and indirect tax laws, this is for various social and economic reasons. In case of tax on income, difference in basic exemptions, threshold limits, exemptions, deductions, slabs and rate of tax etc. as applicable to individuals, AOP, BOI, firms, co-operative societies, different type of companies is well known and is based on intelligible differentia. This contention of the petitioner that tax on book profit of partnership firms and proprietary concerns (that means individuals) is not imposed there for there is discrimination was not at all proper.  

Other aspects about applicability of provision at all as well as computational aspects of book profit are, well known to be amenable to different interpretations and therefore, they are such aspects which can be considered by the AO and failing which higher authorities and courts in different procedures prescribed under law and as may be suitable in given circumstances. Therefore, these aspects were not suitable for pleading in a Writ Petition.

Observations in relation to Article 14 need reconsideration:

With due respect and regards to their lordships, author feels that the observations and one of reasons for rejection of petition for consideration under article 14, given by the honorable court that petitioner  should have provided names and the income of other assesses who are not taxed u/s 115J being firms and proprietary concerns need to be reconsidered.

With humble submission author feels that the petitioner or counsels of petitioners can bring to the notice of the honorable Court the provisions under which other entities are treated differently and it is not necessary to give particulars of such entities and their income.

Major contentions which needed to be raised:

In view of author, the petitioner NTPC missed to place following major contentions which should have been taken:

1. Income-tax is an enactment to impose tax on income and not merely on profits shown in profit and loss account of assessee. The profit or any part of profit as shown in profit and loss account of any assessee, cannot be called ‘income’, in the context of the Indian Constitution and the overall objects of the Income-tax Act, 1961.
2. As per the Union List vide Entry No. 82 the Central Government can impose “tax on Income other than agriculture income”.
3. As per reading and understanding of the author there is no direct definition of ‘Income’ in the Constitution of India. However in the Article 366, we find the following related and relevant definitions on such issue:

366. Definition In this Constitution, unless the context otherwise requires, the following expressions have, the meanings hereby respectively assigned to them, that is to say

(1) ‘agricultural income’ means agricultural income as defined for the purposes of the enactments relating to Indian income tax;

(28) ‘taxation’ includes the imposition of any tax or impost, whether general or local or special, and tax shall be construed accordingly;

(29) ‘tax on income’ includes a tax in the nature of an excess profits tax;

We find that there is meaning of ‘agricultural income’, and it adopts meaning of ‘agricultural income’ as is   for the purposes of the enactments relating to Indian income tax;

Applying the same by corollary it can be said that ‘income’ means income as defined for the purposes of the enactments relating to Indian income tax;

The term ‘tax’ derives meaning from definition of taxation in sub-clause (28). Taxation includes the imposition of any tax, or impost, whether general or local or special and tax is to be construed accordingly. Therefore, income tax can be a tax or impost and it can be of general or special nature.

We find inclusive definition of ‘tax on income’ and find that tax in the nature of an excess profits tax is specifically included in the definition. Therefore, it can be said that though phrase tax on income can be considered in wider sense, however, it cannot go beyond tax on income. Excess profit is considered as income because when profit is in excess of certain norms of profit, then there is assumption of income in such excessive profit. However every element of profit cannot be income.

From the above meaning and definitions we need to examine the following aspects about book profit or a part of book profit vis a vis provisions of the Constitution:

Relevant point to enquire	Answer as per author with reasons
Whether, tax on book profit u/s 115J, 115JA and 115JB can be called a ‘tax’ or ‘impost’ within meaning under clause 366 of the constitution?	No, in case of tax u/s 115JA and 115JB because under these provisions, the tax on book profit (in excess of normal tax) is considered as provisional collection and the law confers on assessee company vital rights for credit or adjustment of the same against tax on income, in future, when company has normal tax liability in excess of tax on book profit, within prescribed period. In case of tax on income any amount collected by government can be called ‘tax’ or ’impost’   when it is imposed with finality and not with possibility of refund or credit in future (except refund of excess tax paid as found on final determination in course of proceedings provided under law for determination of tax or impost). Therefore, tax on book profit or any part of book profit u/s 115JA and 115JB cannot be called a ‘tax’ or ‘impost’ on income within the meaning of clause 366 of the Constitution of India. Therefore, validity of tax u/s 115JA and 115JB can be considered as invalid this ground. Yes, in case of tax u/s 115J, the tax was final tax or impost.
Whether, book profit or any part of book profit is ‘income’ for the purpose of Income-tax Act and the Indian Constitution?	NO- in case of s. 115J, 115JA and 115JB. The IT Act provides for computation of income under different heads, set offs, exemptions and deductions. Book profit can be basis of computation of income but cannot be called ‘income’. Particularly so because as per different method of accounting adopted by assessee, profit can be different not only in one year but also over a longer period of years. Therefore, collection u/s 115J, 115JA and 115JB are not in nature of tax on income. S.115J, 115JA and 115JB all appears to be invalid on this ground.
Whether, book profit or any part of it can be called excess profit?	NO. In absence of any definition of normal profit, and computation of normal profit, any part of book profit cannot be called excess profit. For determining excess profit, there must be meaning and computation of normal profit. Therefore, tax u/s 115J, 115JA and 115JB are not valid even on consideration of permissibility of tax on income by way of excess profit.

 Therefore, S. 115J, 115JA and 115JB are not valid as they do not impose tax on income or excess profits.

S.115JA and 115JB are also in valid for the reason that amount collected under these provisions cannot be called ‘tax’ or ‘impost’.

In equality amongst companies must have been emphasized:

Instead of comparing with partnership and proprietary firms NTPC should have brought to the notice of the honorable Court that due to different standard and generally followed accounting policies which can be adopted by companies differently, the profit shown by companies can be different. Two companies can have similar business , volume and profit. However one company following SLM method of depreciation can have higher profit than other company following WDV method or accelerated depreciation method.

Profit shown can be different due to different accounting policies and methods in relation to other matters also.

Therefore, provisions of S. 115J ,115JA and 115JB cannot be applied uniformly to all companies and the amount of tax being collected will be different. This creates inequality even amongst class of assesses being companies.

Unless all companies are required to adopt the same method of accounting and practices about major aspects of recognition of income, expenses and amortization of capital costs, valuation of inventories, accounting for losses and estimation of expenses , income and losses as may be required, S. 115J ,115JA and 115JB are not valid on ground of discriminations amongst companies, and inequality in the matter of levy of tax due to reason of different accounting policies being permitted and followed by companies. If a tax is to be imposed on the basis of profit shown in P & L account then all companies must be required to adopt same accounting policies and methods so that tax is imposed on same basis . In absence of such mandate, to follow same accounting theories, methods and principals, there is discrimination in levy of tax and such discrimination is not due to logical or intelligible differentiation. It cannot be said that the differentia amongst such companies is an intelligible differentiation.

Restrictions on freedom to trade:

When as per law assessee is permitted to adopt different accounting policies in preparation of accounts the accounting policies which permit maximum profit can be considered as freedom of accounting. Accounting profits are important from the point of view of business and expansion of business. A company having higher book profit is able to raise capital easily and also to get more business in comparison to other company who declare lower book profit due to higher or accelerated charges made on various items of expenses or amortization. Therefore, levy of MAT is definitely a factor which imposes restrictions on trading capabilities of any company.

Suggestions for companies:

Companies can challenge validity of provisions of S. 115J , 115JA and 115JB after further thinking on the matter. Any challenge of a statutory provision must be after detailed study, discussion and brain storming. Just going to senior counsel and requesting him to file a Writ Petition within a short period of time is not proper. First there should be elaborate discussion on the matter with study of all relevant provisions, case laws etc. In such cases it can be said that a delay is better than half prepared case.

Suggestion for Central Government:

Making provision for preparation of Profit and Loss Account as per part II of the Schedule VI is not fool proof. This leaves scope of different companies adopting different methods. For the purpose of imposing a tax in nature of tax on excess profit or say book profit all accounting theories, methods and principals must be provided in the Income-tax Act itself and all companies should be required to prepare profit and loss account for the purpose of tax on super profit based on such uniform accounting methods.

Other cases before other High Courts:

In other cases referred to in links and references also similar contentions were raised besides some other contentions on different aspects relating to applicability and computations and equality, discrimination and restrictions on trade etc. The Courts followed judgment in case of NTPC and dismissed the Writ Petitions.

National Thermal Power Corporation Limited Versus Union Of India And Others 1991 (4) TMI 97 - DELHI HIGH COURT

Suryalatha Spinning Mills Limited And Another Versus Union Of India And Others 1996 (2) TMI 48 - ANDHRA PRADESH HIGH COURT

Karimtharuvi Tea Estates Ltd And Another Versus Deputy Commissioner Of Income-Tax And Others 2000 (7) TMI 11 - KERALA HIGH COURT