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TMI Blog2013 (7) TMI 323X X X X Extracts X X X X X X X X Extracts X X X X ..... t, were liable to pay tax less than that as calculated on 30% of the declared profits. Treating such companies as a separate class has a direct nexus with the object of ensuring that all corporate assessees having profits pay at least the minimum specified tax - Upon a plain reading of section 115J of the Act, the income calculated on the basis of book profits squarely falls within the definition of total income as defined under the Act. Section 115JA only provides for an alternate method for calculating tax and thus, provides a measure for purposes of levying tax. The same cannot be confused with the subject matter of the levy which continues to be tax on income - Section 115J of the Act only creates a legal fiction to supplant the measure of total income which is chargeable to tax. The non obstante clause indicates that the provisions of 115JA of the Act would override the other provisions of the Act for computation of taxable income in certain cases falling within the sweep of section 115JA. Section 115JA of the Act is a special provision to calculate taxable income in certain cases. The levy of income tax is under Section 4 of the Act, which is the charging section. Section 115 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioner has challenged the provisions of Section 115JA of the Act as being ultra vires the Constitution of India. 3. The petitioner has also challenged the provisions of Section 115JAA of the Act which provides for grant of credit in respect of tax paid by an assessee under section 115JA of the Act from the tax payable in subsequent years subject to a maximum period of 5 succeeding assessment years and subject to the assessee paying the minimum alternative tax calculated in accordance with Section 115JA of the Act for the respective years. In terms of Section 115JAA of the Act, the unabsorbed credit would lapse after 5 assessment years. 4. It has been contended on behalf of the petitioner that Section 115JA of the Act provides for payment of minimum alternative tax and the same is violative of Article 265 read with Entry 82 of List I of Schedule VII to the Constitution of India, as it is contended that the tax as computed as per section 115JA of the Act is not a tax on income as per the provisions of the Act. It is further contended that the computation of income under section 115JA of the Act is arbitrary and discriminatory and lacks certainty. It is contended that the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oner has contended that provisions of Section 115JAA indicate that the tax as levied under Section 115JA of the Act only amounts to forcible collection of a deposit even though no tax is payable by an assessee. The tax computed on the basis of section 115JA of the Act is contended to be only a deposit which an assessee is forced to make and the credit for which is available in subsequent years and that too contingent on the assessee having any taxable income as computed under the normal provisions of the Act during the five succeeding years. This imposition of deposit being interest free is contended to be arbitrary and thus unconstitutional. 7. We have heard the learned counsel for the petitioner at length. 8. The provisions of Section 115JA and Section 115JAA of the Act are relevant for the purpose of considering the challenge laid by the petitioner and are quoted below: "115JA.- Deemed income relating to certain companies.- (1) Notwithstanding anything contained in any other provisions of this Act, where in the case of an assessee, being a company, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in any previous year (including the relevant previous year), the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation; or (ii) the amount of income to which any of the provisions of Chapter III applies, if any such amount is credited to the profit and loss account; or (iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account. Explanation.--For the purposes of this clause, the loss shall not include depreciation; or (iv) the amount of profits derived by an industrial undertaking from the business of generation or generation and distribution of power; or (v) the amount of profits derived by an industrial undertaking located in an industrially backward State or district as referred to in sub-section (4) and sub-section (5) of section 80-IB, for the assessment years such industrial undertaking is eligible to claim a deduction of hun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on (1) shall be the difference of the tax paid for any assessment year under subsection (1) of section 115JA and the amount of tax payable by the assessee on his total income computed in accordance with the other provisions of this Act: Provided that no interest shall be payable on the tax credit allowed under sub-section (1). (3) The amount of tax credit determined under sub-section (2) shall be carried forward and set off in accordance with the provisions of sub-section (4) and sub-section (5) but such carry forward shall not be allowed beyond the fifth assessment year immediately succeeding the assessment year in which tax credit becomes allowable under sub-section (1). (4) The tax credit shall be allowed set-off in a year when tax becomes payable on the total income computed in accordance with the provisions of this Act other than section 115JA. (5) Set off in respect of brought forward tax credit shall be allowed for any assessment year to the extent of the difference between the tax on his total income and the tax which would have been payable under the provisions of sub-section (1) of section 115JA for that assessment year. (6) Where as a result of an order under sub-se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iable to pay tax on 30% of the book profits as adjusted in accordance with clauses (a) to (f) and clauses (i) to (ix) of the Explanation to Section 115JA(2) of the Act. This as per the illustration has been assumed to be Rs. 15,00,000/- and 30% of such adjusted book profits would be deemed to be total income chargeable to tax. Thus, the assessee would pay tax on Rs. 4,50,000/- which is computed as Rs. 1,35,000/- assuming the rate of tax to be 30%. In terms of Section 115JAA of the Act, the assessee would be eligible to set off the amount of tax paid on the deemed total income against tax payable in the succeeding 5 years. 10. In the second year, it is assumed that the income of assessee as computed under the provisions of the Act is Rs. 4,00,000/- and a sum of Rs. 1,20,000/- is payable as tax thereon. The adjusted book profits are assumed at Rs. 6,00,000/- and thus, in accordance with the provisions of Section 115JA of the Act, tax on Rs. 1,80,000/- which is deemed to be the total income of the assessee would be payable which amounts to Rs. 54,000/- as tax. Since, the tax payable under the normal provisions of the Act is higher than the tax as would have been payable on deemed tot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to the assessee on account of the tax paid in the previous years is Rs. 51,000/- the assessee would be entitled to claim a set off of the entire amount of Rs. 51,000/- and would be liable to pay a tax of Rs. 3,99,000/- instead of Rs. 4,50,000/- as computed under the normal provisions of the Act. 13. Section 115JA of the Act provides for an alternate method of calculating income to ensure that profitable companies pay tax at least on 30% of the profits declared by them in cases where the taxable income as computed under the normal provisions of the Act is less than 30% of the disclosed book profits as adjusted in accordance with Section 115JA(2) of the Act. The concept of levying a minimum tax was introduced by the Finance Act, 1987 by introduction of section 115J in the Act. The language of section 115J(1) of the Act is similar to the language of section 115JA(1) of the Act. The object and purpose of introducing Section 115J can be easily understood from the Budget Speech of the then Finance Minister of India. The relevant extract of the speech is as under:- "80. It is only fair and proper that the prosperous should pay at least some tax. The phenomenon of so-called "zero-tax" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xes or exempts from tax some incomes or objects and not others. Nor the mere fact that a tax falls more heavily on some in the same category, is by itself a ground to render the law invalid. It is only when within the range of its selection, the law operates unequally and cannot be justified on the basis of a valid classification, that there would be a violation of Article 14." 16. It is well settled that in matters of fiscal legislation, the legislature enjoys a greater degree of flexibility and discretion in respect of classification. A constitution bench of the Supreme Court in the case of Khandige Sham Bhat v. Agricultural Income Tax Officer: AIR 1963 SC 591, while observing that principles of Article 14 of the Constitution of India would be applicable to a tax legislation, clarified as under: "But in the application of the principles, the Courts, in view of the inherent complexity of fiscal adjustment of diverse elements, permit a larger discretion to the Legislature in the matter of classification, so long it adheres to the fundamental principles underlying the said doctrine. The power of the Legislature to classify is of 'wide range and flexibility' so that it can adjust i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of India as under: "It is now well established that while Article 14 forbids class legislation, it does not forbid reasonable classification for the purposes of legislation. In order, however, to pass the test of permissible classification must be fulfilled, namely, (i) that the classification must be founded on an intelligible differentia which distinguished persons or things that are grouped together from others left out of the group and, (ii) that that differentia must have a rational relation to the object sought to be achieved by the statute in question. The classification may be founded on different bases, namely, geographical, or according to objects or occupations or the like. What is necessary is that there must be a nexus between the basis of classification and the object of the Act under consideration. It is also well established that Article 14 condemns discrimination not only by a substantive law but also by a law of procedure." 19. In the present case, the object of introducing Section 115JA of the Act was to ensure that all corporate assessees pay tax at least on 30% of the book profits declared by them. In this respect, section 115JA of the Act affected only t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of Section 115JA are violative of Article 265 read with Entry 82 of List I of Schedule VII to the Constitution of India. Article 265 of the Constitution of India mandates that "no tax shall be levied or collected except by authority of law". Entry 82 of List I of the Seventh Schedule to the Constitution of India reads as "taxes on income other than agriculture income". Admittedly, Parliament has the legislative competence to enact any law for imposing a tax on income. Merely because Section 115JA of the Act provides for an alternate method of calculating taxable income which is different from the normal computation provisions under the Act cannot render the tax based on such computation to be without the authority of law. 23. The contention that tax as computed on the basis of book profits as provided under Section 115JA of the Act would fall outside the scope of tax as defined under Section 2(43) of the Act is also without any merit. Section 2(43) defines tax to, inter alia, mean "income tax chargeable under the provisions of this Act". Section 115JA of the Act only provides for a method for calculating total income of an assessee which is chargeable to tax. The tax a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The amount may be measured in many ways; but a distinction between the subject matter of a tax and the standard by which the amount of tax is measured must not be lost sight of. These are described respectively as the subject of a tax and the measure of a tax. It is true that the standard adopted as a measure of the levy may be indicative of the nature of the tax, but it does not necessarily determine it. The nature of the mechanism by which the tax is to be assessed is not decisive of the essential characteristic of the particular tax charged, though it may throw light on the general character of the tax." 26. Further, while discussing an earlier decision in the case of 'Goodricke Group Ltd. v. State of West Bengal: 1995 Supp(1) SCC 707, in paragraph 126 of its judgment, the Court, inter alia, held as under:- "126. ….. (ii) the subject of tax is different from the measure of the levy; (iii) merely because a tax on land or building is imposed by reference to its income or yield, it does not cease to be a tax on land or building. The income or yield of the land/building is taken merely as a measure of the tax; it does not alter the nature or character of the levy. It stil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oner that the tax paid on the basis of computation under Section 115JA of the Act amounts to a compulsory deposit on which no interest is paid to the assessee is also misconceived. The tax as payable on income as computed under Section 115JA of the Act is a tax levied under the Act, albeit computed on the basis of the book profits of the assessee instead of under the normal computation provisions of the Act. The fact that Section 115JAA of the Act provides for credit on account of tax paid against the tax payable for the subsequent years does not in any manner suggest that the levy on the basis of computation under Section 115JA of the Act is not a tax under the Act. The provisions of Section 115JAA of the Act are provisions for the benefit of an assessee and are intended to give certain credit in computation of the taxes payable by an assessee in respect of any tax paid by the assessee under Section 115JA of the Act. A set off in payment of income tax under Section 115JAA is only available subject to the assessee paying the minimum tax for each year as computed on the basis of Section 115JA. The credit can only be availed for a period of five succeeding years. This too does not in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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