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TMI Blog1991 (4) TMI 179X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies had suffered losses. Appellant filed a return for the year in appeal, i.e., 1989 declaring loss of Rs. 1,67,00,789.21. Assessing Officer computed the income at Rs. 16,732 lakhs. However, after setting off brought forward unabsorbed depreciation, the income was computed at nil. Since the total income computed for the Assessment year in appeal, after taking into consideration unabsorbed depreciation of the past years, was less than 30% of the book profits for the year, section 115J of the Income-tax Act, 1961 was invoked by the Assessing Officer. 2. Section 115J inserted by Finance Act of 1987 with effect from 1-4-1988 provides that where the income of a company as computed under the Act is less than 30% of the book profits the total income of the assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to 30% of such book profits. Book profits have been defined under the said section. Assessee company refuted applicability of provisions of section 115J and filed objections from time to time. The company claimed that it was entitled to adjustment of losses/depreciation, whichever is less suffered from 1960-61 against the income of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 115J of Income-tax Act (1- 2) 489,60.90 3. The company had earned a profit in several assessment years of Rs. 50.636.31 as per Schedule 'C' below : SCHEDULE 'C' (Rupees in lakhs) --------------------------------------------------------------------------------------------------------------------------------------------------- Year Net profit Depreciation Net profit before depreciation --------------------------------------------------------------------------------------------------------------------------------------------------- 1964-65 (+) 214.53 4720.69 4935.22 1965-66 (+) 166.59 2371.93 2538.52 1974-75 (+) 3865.76 7992.87 11858.63 1975-76 (+) 2872.90 6974.02 9846.92 1976-77 (+) 8506.48 7729.96 16236.44 1977-78 (+) 4187.91 9170.26 13358.17 1978-79 (+) 4394.34 9128.24 13522.58 1979-80 (+) 829.16 10451.67 11280.83 1980-81 (+) 96.30 10463.88 10560.18 1981-82 (+) 3910.53 11358.45 15268.98 1984-85 (+) 410.41 23213.84 23624.25 1985-86 (+) 15900.37 34008.96 49909.33 1986-87 (+) 5281.03 23106.70 28387.73 -------------------------- (+) 50,636.31 ------------------------------------------------------------------------------------------ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the Finance Bill of 1987 reported in 165 ITR Statutes to point out that clause (iv) of the Explanation to Section 115J did not find place in the proposed Bill. He referred to page 354 of 165 ITR Statutes to show that an amendment was proposed on the basis of suggestion made during the discussion of the bill. Shri Salve referred to section 205(1)(b) of the Companies Act, 1956 and claimed that assessee was entitled to take into account the loss or depreciation of the previous years and set off the same against the profits for the year for which the dividend was proposed. According to Shri Salve, Section 205 gives an option to the assessee to adjust the loss/depreciation of earlier years either against the profit for the year or against the previous year's profit. According to Shri Salve the option is with the assessee as such the adjustment at the discretion of the assessee was permissible against the book profits for the year in appeal. According to Shri Salve the language of section 205(1)(b) is unambiguous and since section 115J is like a charging section, a strict interpretation is warranted. On plain reading of section 205, Shri Salve contended that there was not doubt tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had made profit in others. The depreciation and loss, if any, had been adjusted by the assessee against the profits of earlier years and as such no further adjustment is permissible to the assessee. According to Shri Rajendra the contention on behalf of the assessee is arbitrary and illogical. The intention of the legislature, according to him, if clear to levy tax at 30% of the book profits of the company. The adjustment permissible under section 205 of the Companies Act was allowed so that the new projects which had just begun to make profits after several years and sick companies that had just turned the comer would not become subject to tax. The adjustment under section 205 of the Companies Act, according to the learned counsel for the revenue, was not provided to defeat the purpose of enacting section 115J. In a case where assessee has suffered loss it would be permissible for adjusting such loss against the profits for the year or against the profits of the preceding years. According to the learned counsel for the revenue, no option is allowed to the assessee company under section 205 not to adjust loss against the profits of the earlier years. If the company has made profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as accordingly urged that the appeal of the assessee may be dismissed. 10. We have given our careful consideration to the rival contentions and have perused the records. Under the Income-tax Act, 1961 certain tax incentives and concessions are available as a result of which several companies were available to reduce their tax liabilities to zero even though they earned huge profits. When it was felt that such profitable companies should contribute at least a small portion of their profits to the national exchequer, when other and less better off sections of society were bearing a burden, section 80VVA was introduced by the Finance Act of 1983 providing that the fiscal incentives and concessions available to the companies would not be more than 70% of the profits. In 1987 it was felt that section 80VVA has not produced the desired results. By the Finance Act of 1987, section 80VVA was withdrawn and a new Chapter XII B was inserted to be operative with effect from1-4-1988i.e., for assessment year 1988-89 onwards. Under Chapter XII B section 115J provides that in the case of any company whose total income as computed under the other provisions of the Income-tax Act, 1961 in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... speech : " The Finance Bill inserts a new section 115J in the Income-tax Act to levy a minimum tax on 'book profits' of certain companies. Representations have been received that in computing book profits for the purpose of determining the minimum tax, losses and unabsorbed depreciation pertaining to earlier years should be allowed to be set off. Otherwise, new projects that have just begun to make profits after some years of losses, and sick companies that have just turned the comer, will become subject to minimum tax. There is merit in this suggestion. Under section 205 of the Companies Act, 1956, past losses or unabsorbed depreciation, whichever is less, are allowed to be set off against the book profits of the current year for determining profits for the purpose of declaring dividend. It is proposed to allow the same adjustments in computation of book profits for purposes of the new provision for levy of minimum tax." 11. The company has prepared profit and loss account in accordance with the Companies Act of 1956. As per the profit and loss account, the profit before taxes has been disclosed at Rs. 35,840.07 lakhs. After adjustment of provisions for taxation, investment al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in any previous financial year or years, which falls or fall after the commencement of the Companies (Amendment) Act, 1960, then the amount of the loss or an amount which is equal to the amount provided for depreciation for that year or those years whichever is less, shall be set off against the profits of the company for the year for which dividend is proposed to be declared or paid or against the profits of the company for any previous financial year or years, arrived at in both cases after providing for depreciation in accordance with the provisions of sub-section (2) or against both ; (c) the Central Government may, if it think necessary so to do in the public interest, allow any company to declare or pay dividend for any financial year out of the profits of the company for that year or any previous financial year or years without providing for depreciation : Provided further that it shall not be necessary for a company to provide for depreciation as aforesaid where dividend for any financial year is declared or paid out of the profits of any previous financial year or years which falls or fall before the Commencement of the Companies (Amendment) Act, 1960." 12. We may a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... possibility that, in our view was foreseen by the Legislature is that the company may have suffered losses in previous financial years and profits of the previous years may not be sufficient to absorb such losses/depreciation, whichever is less, in that case clause (b) to Second Proviso to section 205(1) provides for adjustment of such loss/depreciation whichever is less, against the profits of the previous years and such loss/depreciation, whichever is less, that remains unabsorbed by the profits of the preceding years would be permissible to be set off against the profit of the current year and that is why the expression (or against both) has been used in clause (b) of the First Proviso to section 205(1) of the Companies Act, 1956. We are of the considered view that proviso (b) to section 205(1) of the Companies Act, 1956 does not give any option to the assessee to ignore the profits earned in some of the previous years. The proviso has taken into account the three eventualities as explained above and the adjustment would be permissible in accordance with the facts and circumstances of each case. Since in the appellant's case profits as per Schedule 'C' have been earned by the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n sought by the assessee is accepted then section 115J may not get attracted at all in any of the years where profit earned is not sufficient to absorb the huge losses of Rs. 48,960.90 lakhs. Such interpretation does not appeal to common sense. 16. We may also point out that Section 115J(1A) makes it obligatory for the companies to prepare the profit and loss account in accordance with the provisions of Parts II III of Schedule VI to the Companies Act, 1956 (1 of l956). It is nobody's case that the profits and loss account prepared by the company is not in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956). From the profit and loss account of the previous year as also of the current year, it is evident that the company has adjusted the previous losses/depreciation against the profits earned in earlier years. Thus even if it were to be accepted that the company had the option as claimed, it having exercised the option by adjusting such loss/depreciation in the previous years in its books of account the issue has to be decided against the assessee. 17. In our view, the contention of the assessee that it is entitled to ignore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill pay tax of at least 15% of its book profit. This measure will yield a revenue gain of approximately Rs. 75 crores." In the memorandum explaining the provisions in Finance Bill of 1987 para 37 reads as under : " Under the existing provisions of the Income-tax Act, certain deductions are allowed in the computation of profits and gains of business or profession. Various deductions are also allowed under Chapter VI-A of the Income-tax Act in computing total income. As a result of these concessions, certain companies making huge profits are managing their affairs in such a way as to avoid payment of income-tax. With a view to making the tax system more progressive a new Chapter XII B is proposed to be inserted in the Income-tax Act. Under the proposed amendment, in the case of any company whose total income as computed under the other provisions of the Income-tax Act in respect of any previous year is less than 30% of its book profit, the total income of such taxpayer chargeable to tax shall be deemed to be the amount equal to 30% of such book profit. For the purpose of the aforesaid provisions, "book profit" means the net profit as shown in the profit and loss account in the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nst the book profits of the current year for determining profits for the purpose of declaring dividend. It is proposed to allow the same adjustments in computation. of book profits for purpose of the new provision for levy of minimum tax." It is clear from the speeches of the then Prime Minister and Minister of Finance while introducing the relevant provisions of the Act in the Parliament that the intention of the Legislature was to ensure that the companies making profits contribute part of it to the national exchequer and spare such companies which though having earned a profit might have suffered losses in the past and such losses not having been absorbed by the profits earned by the company. 18. Considering the totality of the circumstances of the case, we are of the considered opinion that the company is liable to tax under section 115J and that its entitlement to set off loss/depreciation, whichever is less, suffered in earlier years would be available in the year of appeal only if the profits earned in some of the past years are not sufficient to absorb the losses/depreciation, whichever is less, suffered by the company since 1960. The decisions cited by the learned coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies having suffered losses in earlier years. Such absurdity and mischief is permitted to be avoided even at the cost of modifying the language used by the Legislature. We may, however, hasten to add that in this case we have not modified the language used by the Legislature. We have simply interpreted the law and tested such interpretation in the light of the intention of the Legislature. We accordingly dismiss the appeal of the assessee on this ground. 21. The next issue in this case is relating to assessee's liability to pay interest under section 234B inserted with effect from1-4-1988by the Direct Tax Laws (Amendment) Act of 1988. A person liable to pay advance tax under section 208, who has either failed to pay such tax or has paid advance tax under provisions of section 210, less than 90% of the assessed tax is liable to pay interest under section 234B. The real question in this case is as to whether the assessee was under an obligation to pay tax in advance. Section 207 of the Income-tax Act, 1961 reads as under : " 207. Liability for payment of advance tax :-- Tax shall be payable in advance during any financial year, in accordance with the provisions of sections 208 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is deemed to be 30% of the book profits, applies only for purposes of section 115J and it does not extend beyond that. The fiction has been created for a definite purpose and in our view, it will operate within its field for which it is created. Unless the books of account are completed and the book profits determined, one cannot decide as to whether the assessee is liable to pay any tax under section 115J. It would be unfair if section 115J is extended to the payment of advance tax as it would be extending the field of legal fiction beyond the definite purpose for which it has been created. As is clear from the language of section 115J, the liability of the assessee arises only if the total income as computed under the Act in respect of any previous year relevant to assessment year commencing on or after the first day of April, 1988 is less than 30% of its book profits. Whereas for the purposes of payment of advance tax the total income computed in accordance with the Act is the basis for payment of advance tax, the liability under section 115J arises only if the income is less than 30% of its book profits. The book profits can be determined only after the books of account are c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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