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http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 12 CASE NO.: Appeal (civil) 5420-5423 of 2002 PETITIONER: Malayala Manorama Co. Ltd. RESPONDENT: Commissioner of Income Tax,Trivandrum DATE OF JUDGMENT: 10/04/2008 BENCH: Ashok Bhan & Dalveer Bhandari JUDGMENT: J U D G M E N T Dalveer Bhandari, J. These appeals are directed against the judgment passed by a Division Bench of the Kerala High Court at Ernakulam on 13th November, 2001 whereby the High Court has decided Income Tax Reference Nos.245, 259, 289 and 293 of 1999 by a common judgment. The main question which arose for consideration before the Court below was: \023Whether in respect of a company consistently charging depreciation in its books of account at the rates prescribed in the Income-tax Rules, the Income Tax Officer has juri iction under section 115J of the Income Tax Act, 1961 to rework net profits by substituting the rates prescribed in Schedule XIV of the Companies Act, 1956?\024 The concept of a minimum tax on zero tax companies was introduced under section 80VVA of the Income Tax Act, 1961 (hereinafter referred to as \023the 1961 Act\024) when a ceiling was placed on allowances by the Finance Act, 1983 with effect from the Assessment Year 1984-85. However, the allowances unabsorbed, because of the restriction imposed by the ceiling, were carried forward, so that they could be absorbed in a later year, if adequate profits are available. Section 80VVA was dropped from the statute by the Finance Act, 1987, with effect from A.Y. 1988-89, when replaced Book Profits Tax by section 115J of the 1961 Act. But it was materially different in one respect that no part of the tax on book profits could be adjusted against tax on regular assessment at a future date. It may be pertinent to mention that the Book Profit Tax was abandoned with effect from A.Y. 1990-91 by the Finance Act, 1990. It was re- introduced with a new name \023Minimum Alternate Tax\024 with effect from A.Y. 1997-98 under section 115JA. For ready reference, we deem it appropriate to reproduce section 115J of the 1961 Act as under: \023115-J. Special provisions relating to
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 12 certain companies.\027 (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee being a company other than a company engaged in the business of generation or distribution of electricity, 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, 1988 but before the 1st day of April, 1991 (hereafter in this section referred to as the relevant previous year) is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit. (1-A) 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 (1 of 1956).
Explanation.\027For the purposes of this section, \021book profit\022 means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub- section (1-A), as increased by\027 (a) the amount of income tax paid or payable, and the provision therefor; or (b) the amounts carried to any reserves other than the reserves specified in Section 80-HHD or sub-section (1) of Section 33-AC, by whatever name called; or (c) the amount or amounts set aside to provisions made for meeting liabilities other than ascertained liabilities; or (d) the amount by way of provision for losses of subsidiary companies; or (e) the amount or amounts of dividends paid or proposed; or (f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies; or (g) the amount withdrawn from the reserve account under Section 80-HHD, where it has been utilised for any purpose other than those referred to in sub- section (4) of that section; or (h) the amount credited to the reserve account under Section 80-HHD, to the extent that amount has not been utilised within the period specified in sub- section (4) of that section; (ha) the amount deemed to be the
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 12 profits under sub-section (3) of Section 33-AC; if any amount referred to in clauses (a) to (f) is debited or, as the case may be, the amount referred to in clauses (g) and (h) is not credited to the profit and loss account, and as reduced by,\027 (i) the amount withdrawn from reserves other than the reserves specified in Section 80-HHD or provisions, if any such amount is credited to the profit and loss account: Provided that, where this section is applicable to an assessee 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, 1988 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 amounts as arrived at after increasing the net profit by the amounts referred to in clauses (a) to (f) and reducing the net profit by the amounts referred to in clauses (i) and (ii) attributable to the business, the profits from which are eligible for deduction under Section 80-HHC or Section 80-HHD; so, however, that such amounts are computed in the manner specified in sub-section (3) or sub-section (3-A) of Section 80-HHC or sub-section (3) of Section 80-HHD, as the case may be; or (iv) the amount of the loss or the amount of depreciation which would be required to be set off against the profit of the relevant previous year as if the provisions of clause (b) of the first proviso to sub-section (1) of Section 205 of the Companies Act, 1956 (1 of 1956), are applicable. (2) Nothing contained in sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of sub-
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 12 section (2) of Section 32 or sub-section (3) of Section 32-A or clause (ii) of sub-section (1) of Section 72 or Section 73 or Section 74 or sub-section (3) of Section 74-A or sub- section (3) of Section 80-J.\024
A new Chapter XII-B containing section 115J was inserted by the Finance Act, 1987 with effect from Ist April, 1988. This new section made provisions for levy of minimum tax on book profits of certain companies. The scope and effect of these provisions have been elaborated in the following portion of the departmental circular No.495, dated 22nd September, 1987:- "New provisions to levy minimum tax on "book profit" of certain companies:
1 It is an accepted cannon of taxation to levy tax on the basis of ability to pay. However, as a result of various tax concessions and incentives certain companies making huge profits and also declaring substantial dividends, have been managing their affairs in such a way as to avoid payment of income-tax.
2 Accordingly, as a measure of equity, section 115J has been introduced by the Finance Act. By virtue of the new provisions, in the case of a company whose total income as computed under the provisions of the Income-tax Act is less then 30% of the book profit computed under the section, the total income chargeable to tax will be 30 % of the book profit as computed. For the purposes of section 115J, book profits will be the net profit as shown in the profit and loss account prepared in accordance with the provisions of Schedule VI to the Companies Act, 1956, after certain adjustments. The net profit as above will be increased by income-tax paid or payable or the provisions thereof, amount carried to any reserve, provision made for liabilities other than ascertained liabilities, provision for losses of subsidiary companies, etc., if the amounts are debited to the profit and loss account. Liabilities relating to expenditure which has been incurred or which has accrued in respect of expenses which are otherwise deductible in computing income will not be added back. The amount so arrived at is to be reduced by- (i) amounts withdrawn from reserves, if any such amount is credited to the profit and loss account; (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; and (iii) the amount of any brought forward losses or unabsorbed depreciation whichever is less as computed under the provisions of section 205(1)(b) of the
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 12 Companies Act, 1956, for the purposes of declaration of dividends. Section 205 of the Companies Act requires every company desirous of declaring dividend to provide for depreciation for the relevant accounting year. Further, the company is required under section 205 to set off against the profit of the relevant accounting year, the depreciation debited to the profit and loss account of any earlier year(s) or loss whichever is less. 36.3 Section 115J, therefore, involves two processes. Firstly, an assessing authority has to determine the income of the company under the provisions of the Income-tax Act. Secondly, the book profit is to be worked out in accordance with the Explanation to section 115J(1) and it is to be seen whether the income determined under the first process is less than 30 per cent of the book profit. Section 115J would be invoked if the income determined under the first process is less than 30 per cent of the book profit.\024
The whole purpose of section 115J was to tax a company which had no taxable income, but showed a book profit. For instance, a company which adopted the method of straight-line depreciation (as it is entitled to do under the Companies Act, 1956 (hereinafter referred to as \023the 1956 Act\024), or a company which had not debited to its profit and loss account, the capital expenditure on scientific research and development which is fully deductible under section 35 of the 1961 Act would be assessed to tax under this section.
It was submitted on behalf of the appellant that in the profit & loss account the assessee has debited depreciation at the rates prescribed by the Income-tax Rules, 1962. This has been the consistent practice of the assessee throughout. Section 211(2) of the 1956 Act mandates that every profit and loss account of a company shall give a true and fair view of the profit or loss of the company for the financial year and shall comply with the requirements of Parts-II of Schedule VI so far as they are applicable thereto. The accounts of the assessee for the relevant assessment years 1988-89 and 1989-90 are audited under section 227 of the 1956 Act. The audit report confirms that the accounts of the assessee represent a \023true and fair view\024. The accounts have further been passed and approved by the general body of shareholders at the Annual General Meeting. The said accounts have been filed with the