2001 (8) TMI 310 - AT - Income Tax

Application of MAT - Electricity Company - Modus for the computation of book profit - Maharashtra State Electricity Board (statutory corporation) construed to be a company for the purpose of section 115JA - Subsidy attributable to industrial undertaking - Nexus with the profits from the business of generation or generation and distribution of power - Prior period adjustments - bad and doubtful debts. Held that - It is true that the word used in section115JA of the Act is company . The heading of this section is Deemed income relating to certain companies . The provision begins with a non obstante clause. It applies to every assessee being a company. The panoply of the section is erected over the structure of Companies Act 1956. The Minimum Alternate Tax (MAT) on companies was introduced by the Finance (No. 2) Act 1996 with effect from 1-4-1997. This was necessitated due to the rise in the number of zero-tax companies. Studies have shown that in spite of the fact that companies have earned substantial book profits and have paid handsome dividends no tax has been paid by them to the exchequer. To curb this mischief MAT was introduced by inserting section115JA. This is a deeming provision. It is a trite law that deeming provision should be narrowly watched jealously regarded and never to be pressed beyond its true limits. It is applicable to a company. The assessee is not a company. It is not required to distribute any dividend. As such it does not come within the mischief of this section. In our opinion a corporation cannot be construed to be a company for the purpose of charging the Minimum Alternate Tax . The case of the assessee falls beyond the ken of section115JA. We decide this issue in favour of the assessee and against the revenue. In the present case we find that subsidy was attributable to industrial undertaking from the business of generation or generation and distribution of power. It cannot be said to be derived from because its nexus with the business was not direct but proximate. Similarly grants interest on staff loans interest from consumers interest on advances to suppliers income from investment in bank deposits interest on other investment interest on banks rent from staff quarters rent charges from contractors commission for collection of electricity duty and other miscellaneous receipts do not bear direct nexus with the amount of profits of the business of generation or generation and distribution of power. These receipts bear only the proximate nexus with the profits from the business of generation or generation and distribution of power. We have perused the various reasonings adduced in the impugned order. We are inclined to agree with the view taken by the CIT(A) on this count. The term book profits is defined in Explanation to section 115JA. It means the net profit shown in the Profit Loss Account. Only those adjustments which are specified in the section are permissible. The scope of the provision cannot be curtailed. The practice adopted by the assessee of debiting the prior period expenses into the revenue account was in consonance with the well-established accounting principle. We have considered the provisions of Electricity (Supply) (Annual Accounts) Rules also. In our opinion the contention of the assessee is correct on this count. We decide this issue in favour of the assessee and against the revenue. The provision of Rs. 3.3 crores in respect of bad and doubtful debts in our opinion this cannot be disregarded in computing the book profit. Assessing Officer was not correct in treating the provision one made for meeting a liability. In making this provision assessee only restated the value of the assets. There was no question of setting aside any amount to meet the liability. Having regard to the facts we decide this issue also in favour of the assessee and against the revenue. In the result appeal of the assessee stands allowed protanto

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

(i) Whether the assessee, Maharashtra State Electricity Board (MSEB), could be construed as a company for the purposes of applying the provisions of section 115JA of the Income-tax Act, 1961?

(ii) Whether the provisions contained in clause (iv) of the Explanation to section 115JA(2) could be applied in respect of various forms of income such as subsidies, grants, interest on delayed payments from consumers, liquidated damages received from contractors, and other miscellaneous receipts?

(iii) Whether the method for the computation of book profit was correctly applied, particularly regarding the deduction related to prior period adjustments and provision for bad and doubtful debts?

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Whether MSEB could be construed as a company for the purposes of section 115JA?

The relevant legal framework includes section 115JA of the Income-tax Act, which imposes a minimum tax on companies with book profits. Section 80 of the Electricity (Supply) Act, 1948 deems the Board to be a company for income-tax purposes. However, the Court noted that MSEB, being a statutory corporation, does not fit the definition of a company under the Companies Act, 1956, which is necessary for the application of section 115JA.

The Court's reasoning focused on the interpretation of "company" within section 115JA, emphasizing that the section is designed for entities that prepare accounts according to the Companies Act. MSEB, governed by the Electricity (Supply) Act, is not required to prepare accounts under the Companies Act, thus falling outside the scope of section 115JA.

In conclusion, the Court determined that MSEB could not be considered a company for the purposes of section 115JA, as it does not meet the statutory requirements set out in the Companies Act.

Issue (ii): Application of clause (iv) of Explanation to section 115JA(2) to various forms of income

The legal framework involves the interpretation of "derived from" versus "attributable to" in determining the applicability of section 115JA to various forms of income. The Court examined whether the income types in question had a direct nexus with the business of generation and distribution of power.

The Court found that subsidies and grants were attributable to, but not directly derived from, the business operations. Similarly, other forms of income, such as interest from consumers and miscellaneous receipts, were seen as having a proximate rather than direct nexus with the core business activities.

Ultimately, the Court agreed with the CIT(A)'s view that these income types did not fall within the scope of section 115JA's provisions, as they lacked a direct connection to the business profits.

Issue (iii): Computation of book profit and deductions for prior period adjustments and provision for bad and doubtful debts

The legal framework involves the definition of "book profits" under section 115JA, which refers to net profit shown in the Profit & Loss Account. The Court considered the accounting practices of MSEB, which adhered to the Electricity (Supply) (Annual Accounts) Rules, 1985.

The Court found that the inclusion of prior period adjustments in the revenue account was consistent with established accounting principles and should not be adjusted for the purposes of section 115JA. Similarly, the provision for bad and doubtful debts was deemed a restatement of asset value, not a liability, and thus should not be added back to book profits.

The Court concluded that the assessee's computation methods were correct, and the deductions should be allowed.

3. SIGNIFICANT HOLDINGS

The Court held that MSEB could not be considered a company for the purposes of section 115JA, as it does not meet the criteria set out in the Companies Act. This interpretation is crucial, as it determines the applicability of the minimum alternate tax provisions to statutory corporations like MSEB.

On the issue of various forms of income, the Court established that only income directly derived from the business of generation and distribution of power falls within the scope of section 115JA, thereby excluding many of the income types in question.

Regarding the computation of book profits, the Court upheld the assessee's accounting practices, affirming that prior period adjustments and provisions for bad and doubtful debts should not be adjusted for tax purposes under section 115JA.

In conclusion, the appeal of the assessee was allowed, with the Court ruling in favor of the assessee on all significant issues presented.