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TMI Blog2010 (10) TMI 1182X X X X Extracts X X X X X X X X Extracts X X X X ..... ndamus or an order directing the respondent No.2 3 to allow the reduction of the brought forward losses of ₹ 11,67,85,411/- of the petitioner company from the net profit in order to compute the book profit under the MAT provisions (i.e. 115 JB of the Act) of the Income Tax Act, 1961 in the absence of any unabsorbed depreciation in respect of the assessment year 2008-2009; 2. The facts as appearing in the petition are that the petitioner is a Private Company, limited by shares, incorporated in Scotland, U.K. under the Companies Act, 1985 and is a subsidiary of M/s Cairn India Holdings Ltd., a company registered in Jersey Channel Island. The petitioner No.1 Company is primarily engaged in the business of prospecting, drilling, exploring, producing and generally dealing in minerals, oils, gas and other related by-products. On 23.09.2005, the petitioner company, entered into a Production Sharing Contract (PSC) with the Government of India and, Oil Natural Gas Corporation Ltd. (ONGC) for the exploration of natural resources. According to the PSC, the petitioner had a 49% participating interest in the contract area and, therefore, the petitioner company formed an Unincorpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business loss of ₹ 11,59,78,656/- for assessment year 2007-08. 2.2 The petitioner company had only brought forward business losses, but no unabsorbed depreciation owing to the peculiar fact that it never charged any depreciation in the past/current year since neither the petitioner nor the UJV owned any fixed assets. In fact, whenever any asset was needed for carrying out the business activities by the UJV, these were taken on hire basis by the UJV. 2.3 As a part of the corporate restructuring, the petitioner company in the financial year 2007-08 relevant to assessment year 2008-09, vide deed of assignment dated 23.3.2007, assigned its participating interest in the UJV to M/s Cairn India Limited, a group company, at exploration cost incurred till the effective date of assignment. According to the petitioner, as a result of the assignment, the petitioner company was only recouping the accumulated costs incurred on exploration activities. Up till the date of assignment, the petitioner company had incurred aggregate expenditure of ₹ 16,17,33,783/- on exploration. The petitioner company on assignment of its participatory interest in the UJV to M/s Cairn India Ltd., r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year commencing on or after the 1st day of April 2007, is less than ten per cent of its book profit, then notwithstanding anything contained in any other provision of the Act, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income tax at the rate of ten percent. Sub-section (2) thereof provides that, every assessee, being a company, shall, for the purpose of the section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. The proviso thereto provides for the manner in which annual accounts are to be prepared. Explanation 1 thereto provides that, for the purpose of this section, book profit means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by clauses (a) to (f) thereof, if any amount referred to in clauses (a) to (f) thereof is debited to the profit and loss account, and as reduced by clause (i) to (vii) there of. Clause (iii) of the Explanation provides for reduction from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of the assessment year 2008-09. 3. Heard Mr. C. S. Agarwal, learned Senior Advocate with Mr. Tushar Hemani, learned advocate for the petitioner and Mr. M. R. Bhatt, learned Senior Advocate for the respondents. 4. Mr. Agarwal, learned Senior Advocate for the petitioner invited attention to the provisions of section 115JB of the Act, the historical background leading to the enactment of the said provision, as well as the objects and reasons for bringing the original enacted provision on the statute book. The learned Senior Advocate also invited attention to the budget speech of the then Finance Minister of India made in Parliament while introducing the said section to submit that the intention behind introducing the said provision was to tax highly profitable companies and no more. 4.1 It was submitted that clause (iii) of Explanation 1 to section 115JB of the Act read with clause (b) of the Explanation thereto are contrary to the purpose of the enactment of section 115JB of the Act, which provides for levy of Minimum Alternative Tax. It was further submitted that, the said provision was introduced to tax such companies which were having large profits and, were distri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot allowing a reduction of loss, the legislature has not made a reasonable classification since assessees who may not be owing any asset are required to pay tax despite the fact that there is no income, which has no nexus to the object sought to be achieved by the legislation, that is, to tax dividend paying companies. In support of his submissions, the learned Senior Advocate for the petitioner has placed reliance upon the following decisions : (a) Peerless General Finance and Investment Co. Ltd. v. Union of India, (1987) 1 SCC 424, (b) S.C. Prashar and Another v. Vasantsen Dwarkadas and others, (1963) 49 ITR 1 (SC), (c) D.S. Nakara v. Union of India, [1983] 1 SCC 305. (d) Maneka Gandhi v. Union of India, [1978] 1 SCC 248. (e) S.K. Datta, ITO v. Lawrence Singh Ingty, 68 ITR 272 (SC). (f) Star Television News Ltd. v. Union of India, 317 ITR 76 (Bom). 4.3 Next it was urged that there is no rationale or valid basis to restrict the relief to unabsorbed depreciation or business loss, which ever is lower, particularly when the purpose of clause (iii) to the Explanation is to provide relief of losses of earlier years and not to deny relief of setting off of loss or u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 The next submission advanced on behalf of the petitioner was that where the plain literal interpretation of a statutory provision produces a discriminatory or incongruous or manifestly absurd or unjust result which could never have been intended by the Legislature, the Court may modify the language used by the Legislature or even do some violence to it, so as to achieve the obvious intention of the Legislature and produce a rational construction. It was submitted that it could never have been the intention of the Legislature to tax an assessee without being in receipt of any income. It was submitted that if the provisions of clause (iii) of Explanation 1 to section 115 JB of the Act are required to operate, the same would result into manifestly absurd or unjust result inasmuch as the assessee despite having no income, would be assessed to income merely for the reason that the assessee does not have any asset so as to claim depreciation. In support of his submissions, the learned counsel placed reliance upon the following decisions : [a] K.P.Varghese v. I.T.O., [1981] 131 ITR 597 (SC). [b] C.W.S. (India) Ltd. v. CIT, [1994] 208 ITR 649 (SC). [c] Calcutta Gujarati Educat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either of them is absent, he is denied the set off by disregarding the fact that such a citizen may not have any depreciable asset and, carries the same business without a depreciable asset. Thus, by denying such a citizen the right to set off loss also violates Article 19(1)(g) of the Constitution of India. In support of his submissions the learned counsel placed reliance upon the following decisions: [a] The decision of the apex court in the case of State of Kerala v. Haji K. Haji Kutty Naha, AIR 1969 SC 378, was cited for the proposition that the validity of a taxing statute is open to attack on the ground that it infringes fundamental rights. [b] The decision of the apex court in the case of Khandige Sham Bhatt v. Agricultural ITO, [1963] 48 ITR 21 (SC), was cited for the proposition that a State cannot make any law which takes away or abridges the equality clause contained in Article 14 of the Constitution which enjoins a State not to deny to any person equality before law or equal protection of law. 4.9 Next, it was submitted that no reason emanates from the Finance Bill explaining the amendment and, as such, the provision is unconstitutional. It was submitted that n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endment in clause (iii) of the Explanation to section 115JB, clarifies that where the value of the amount of either loss brought forward or unabsorbed depreciation is Nil , no amount on account of such loss brought forward or unabsorbed depreciation would be reduced from the book profit. It was contended that while the language of the provisions of clause (iii) of Explanation 1 to section 115 JB of the Act is by itself quite clear and unambiguous, the explanatory circular makes the application of the provisions absolutely clear. It was submitted that there was nothing unfair or discriminatory about the provisions of clause (iii) of Explanation 1 to section 115 JB of the Act and that, it is a well laid down judicial principle that having regard to the wide variety of diverse economic criteria that go into the formulation of fiscal policy, the legislature enjoys a wide latitude in the matter of selection of persons, subject matters, events etc. for taxation. The MAT provisions have basically been introduced as a measure of equity in taxation. The legislature does not have to tax everything in order to be able to tax something. If there is equality and uniformity within each group, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely because in the preceding year expenditure had been incurred which had resulted into book loss and in the succeeding year, when there is such recoupment of expenditure, the same is to be treated to be a book profit so as to levy the Minimum Alternate Tax which is absolutely beyond the object and purpose of the enactment. 7 The principal and only challenge in the present petition is to the constitutional validity of clause (iii) of Explanation 1 of section 115JB of the Act on the ground that the same is discriminatory and arbitrary inasmuch as while computing the book profit the same provides for reduction from the net profit of loss brought forward or unabsorbed depreciation whichever is less, which means that if either of the two are absent the assessee would not be entitled to reduction in the book profit. Thus, the provision has been challenged as being discriminatory towards those assessees like the petitioner, who do not have capital asset based infrastructure and as such would not have any unabsorbed depreciation. Thus, despite having substantial brought forward loss, the petitioner in the light of the provisions of clause (iii) of the Explanation to section 115JB of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oposed 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 per cent of its book profit, the total income of such taxpayer chargeable to tax shall be deemed to be the amount equal to 30 per cent of such book profit. For the purposes of the aforesaid provisions, book profit means the net profit as shown in the profit and loss account in the relevant previous year prepared in accordance with the provisions of Parts II and III of the Sixth Schedule to the Companies Act, 1956, subject to adjustments in respect of any amount of income tax paid or payable, any amount carried to any reserve set aside to meet any provision, or provision for loss of subsidiary companies or any amount set apart for declaration of dividends which are taken into the profit and loss account prepared in accordance with the Sixth Schedule as above. However, the expenditure relating to income as well as the receipts relating to incomes to which the provisions of Chapter III of the Income Tax Act apply, will be excluded from the computat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsofar as the same is relevant for the present purpose reads thus: 115-JB. Special provision for payment of tax by certain companies.-(1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2007, is less than ten per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income tax at the rate of ten per cent. (2) Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956: Provided that while preparing the annual accounts including profit and loss account,- (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including profit and loss account; (iii) the method and rates adopted for c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear to have helped. Hence, the same was withdrawn and Chapter XII-B came to be inserted introducing section 115J of the Act, a provision whereby every company would have to pay minimum corporate tax on the profits declared by it in its own accounts. As the number of zero tax companies and companies paying marginal tax had grown, Minimum Alternate Tax was levied from assessment year 1997-98 by virtue of the provisions of section 115JA which came to be inserted by the Finance Act, 1996 with effect from 1.4.1997. However, the efficacy of the said provisions had declined in view of the exclusions of various sectors from the operation of MAT and the credit system. It had also led to legal complications. Hence, in its place section 115JB came to be inserted by the Finance Act, 2000, with effect from 1.4.2001, which is simpler in application. The provisions of section 115JB as originally inserted provided that all companies having book profit under the Companies Act, prepared in accordance with Part-II and Part-III of Schedule-VI to the Companies Act, shall be liable to pay a minimum alternate tax at a lower rate of 7.5%, as against the then existing effective rate of 10.5% of the book ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not have any unabsorbed depreciation as per its books of account and as such while computing its book profit, it is not entitled to the benefit of reduction of the net profit under clause (iii) of the Explanation to section 115JB. The petitioner has therefore, challenged the constitutional validity of the said provision contending that the policy behind the enactment is to tax zero-tax paying prosperous companies, whereas as a result of the operation of the impugned provision, which does not permit reduction of the net profit by brought forward loss in the absence of unabsorbed depreciation while computing the book profit, even a company like the petitioner who has no actual income in the year under consideration, is liable to pay tax at the specified rate on its book profit. According to the petitioner, the impugned provision insofar as the same provides for reduction of the book profit in case of companies having both brought forward loss and unabsorbed depreciation to the extent of the lesser of the two, is violative of Article 14 of the Constitution of India vis - vis those companies who have either only brought forward loss or unabsorbed depreciation. It is accordingly c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessees falling within the ambit of section 115JB. The fact that in a given case an assessee may not have any unabsorbed depreciation or any brought forward loss in its books of account, as a consequence of which the assessee would not be entitled to reduction of the book profit under the impugned provision, is a mere fortuitous circumstance. The legislature, while enacting a provision is not required to meet with or envisage every fortuitous circumstance that may arise while implementing such provision. Merely because in a given circumstance, the provision may act to the disadvantage of a particular assessee would not render the provision arbitrary, nor can it be said that the same violates the equality clause. [7.11] In Government of A.P. v. Laxmi Devi, (2008) 4 SCC 720, the Supreme Court has analyzed and explained the power of judicial review of statutes. It has been held in the said decision that while the court has the power to declare a statute to be unconstitutional, it should exercise great restraint in this connection. In the opinion of the Court, there is one and only one ground for declaring an Act of the legislature (or a provision in the Act) to be invalid, and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht to be achieved. Article 14 does not insist upon classification, which is scientifically perfect or logically complete. A classification would be justified unless it is patently arbitrary. If there is equality and uniformity in each group, the law will not become discriminatory, though due to some fortuitous circumstance arising out of peculiar situation some included in a class get an advantage over others so long as they are not singled out for special treatment. [7.14] In the case of D. C. Bhatia v. Union of India, (1995) 1 SCC 104, the Supreme Court held that if there is some nexus between the object sought to be achieved and the classification, the legislature is presumed to have acted in proper exercise of its constitutional power. The classification in practice may result in some hardship. But, a statutory discrimination cannot be set aside, if there are facts on the basis of which this statutory discrimination can be justified. The Court can only consider whether the classification has been done on an understandable basis having regard to the object of the statute. The Court will not question its validity on the ground of lack of legislative wisdom. The classification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re put to some hardship, it does not mean that the legislature has created a distinct class of companies. As held by the Apex Court in State of A.P. v. Nallamilli Ramli Reddi (supra), a classification would be justified unless it is patently arbitrary. If there is equality and uniformity in each group, the law will not become discriminatory; though due to some fortuitous circumstance arising out of peculiar situation some included in a class get an advantage over others so long as they are not singled out for special treatment. [7.17] Under the Scheme of the Act, an assessee is entitled to carry forward its losses as well as unabsorbed depreciation and set off of the same in its regular assessment. It is only if after determining the total income of the company under the normal provisions, the income tax payable is less than 10% of its book profit that the income of such company is to be computed under section 115JB of the Act and the company becomes liable to pay tax at the rate of 10% of its book profit as computed under the provisions of section 115JB. The computation includes reduction of the book profit under clause (iii) of the Explanation to section 115JB of the Act. Thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ine of Reading Down is an internal aid to construe the words or phrase in a statute to give it a reasonable meaning. The object of reading down is to keep the operation of the statute within the purpose of the Act and constitutionally valid. Thus, in order to save a statute or a part thereof from being struck down it can be suitably read down. However, reading down is not permissible in such a manner as would fly in the face of the express terms of the statutory provisions. It is a very well settled legal position, that if the Court while construing a provision, finds that the same is ambiguous, the Court instead of striking it down, may read it down so as to save the constitutional validity. Moreover, the rule of reading down applies only where two views are possible as to the meaning of the statutory language. (See Delhi Transport Corporation v. D.T.C. Mazdoor Congress, 1991 Supp (1) SCC 600, C.B. Gautam v. Union of India , (1993) 1 SCC 78, and Rapti Commission Agency v. State of U.P., (2006) 6 SCC 522). [7.21] In the present case, the Court does not find the impugned provision to be in any manner unconstitutional, hence, the question of reading it down to save its constitutio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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