CAIRN INDIA HOLDING LTD. vs. ASSISTANT COMMISSIONER OF INCOME TAX ( INTL TAXN ) 1

Facts

The assessee, Cairn India Holding Ltd., filed this Tax Appeal against an order of the Income Tax Appellate Tribunal (ITAT) dated August 1, 2018, for Assessment Year 2008-09. The appeal challenges the constitutional validity of clause (iii) in Explanation 1 to Section 115JB(2) of the Income Tax Act, 1961, read with Explanation (b) thereto. The core of the dispute revolves around the provision that allows reduction of book profit by the lower of brought forward loss or unabsorbed depreciation. The assessee argued that this provision is discriminatory and unconstitutional, particularly for businesses not utilizing depreciable assets. The High Court noted that this very issue had been decided by it previously in relation to the same assessee.

Held

The High Court held that the proposed questions of law were no longer res integra, as the Court had previously considered and decided the constitutional validity of the very same provision in the case of the same assessee in Special Civil Application No. 11581 of 2008, decided on October 21, 2010. In that prior decision, the Court had upheld the validity of clause (iii) in Explanation 1 to Section 115JB(2) of the Act. The Court reasoned that Section 115JB is a special provision for computing minimum tax on book profits when the normal tax payable is less than 10% of book profit. It clarified that an assessee is entitled to carry forward losses and unabsorbed depreciation for set-off under normal assessment. The Court found no unconstitutionality in the provision and therefore, the question of reading it down did not arise. The Court concluded that the impugned provision was clear and unambiguous, and the request to read down the provision was not accepted. Consequently, the relief sought by the assessee to reduce brought forward losses from net profit in the absence of unabsorbed depreciation was denied. The prior judgment dismissed the petition, and by extension, this Tax Appeal also fails.

Key Issues

1. Whether the provisions of clause (iii) in Explanation 1 to Section 115JB(2) of the Act, read with Explanation (b) thereto, which renders them inapplicable if either loss brought forward or unabsorbed depreciation is nil, are ultra vires the Income Tax Act, 1961, and the Constitution of India? (Question of law) 2. Whether the aforesaid provision, in the context of an assessee not employing depreciable assets due to the nature of its business, is arbitrary, discriminatory, and unconstitutional, violating Articles 14 and 19(1)(g) of the Constitution of India? (Question of mixed law and fact) 3. Whether the aforesaid provision, by taxing artificial profits, runs contrary to the object of Section 115JB, the Income Tax Act, 1961, and Article 265 of the Constitution of India, making it ultra vires and invalid? (Question of law) 4. Whether the aforesaid provisions run contrary to the normal provisions of the Act, which do not provide a distinction between brought forward business loss and unabsorbed depreciation under the 'whichever is less' clause? (Question of law) 5. Whether the Income Tax Act, 1961, creates a distinction between assessees based on the mode of acquisition/usage of depreciable fixed assets in matters of set-off of losses, and if so, is such a provision ultra vires the Act and the Constitution? (Question of law) Assessee's Contentions: The assessee argued that the impugned provision is discriminatory and arbitrary because it denies legitimate deduction of actual business losses for assessees not having capital asset-based infrastructure and thus no unabsorbed depreciation, despite substantial brought forward losses. This creates an artificial distinction and violates Articles 14 and 19(1)(g). It also argued that taxing artificial profits contravenes the object of Section 115JB and Article 265, and that the provision is inconsistent with normal tax provisions. The assessee also sought to read down the provision to avoid an absurd and unjust result. Revenue's Contentions: The judgment does not explicitly record separate contentions for the revenue. However, it refers to a previous decision of the same court that upheld the validity of the provision.