1. Appellant company is a public sector company running several steel plants. The company was registered under the Companies Act, 1956 on 24th January, 1973. It started functioning as holding company with some subsidiary companies in 1978 under the Public Sector Iron and Steel Companies (Restructuring) and Miscellaneous Act, 1978. As a consequence, appellant company became operating company with effect from 1-5-1978 and following subsidiaries were dissolved : As per Clause 6 of the Restructuring Act of 1978, the accumulated losses and unabsorbed depreciation if any of the dissolved companies was deemed to be loss or as the case may be, depreciation of the integral company. From 1960-61 onwards the dissolved companies had suffered losses. Appellant filed a return for the year in appeal, i.e., 1989 declaring loss of Rs. l',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 in voked 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 current year by virtue of Explanation (iv) to Section 115J of the Income-tax Act, 1961 read with Clause (b) of proviso to Section 205(1) of the Companies Act, 1956. The details of loss suffered by the company are given as under :------------------------------------------------------Year Net loss(-) Depreciation Net loss(-)/ Profit (+)------------------------------------------------------1960-61 (-) 74.34 374.82 (+) 300.48 The Assessing Officer worked out the book profits at Rs. 35,271.32 lakhs as against which assessee claims a loss of Rs. 56,977.94 lakhs to be adjustable and consequently Section 115J to be inapplicable. During the course of assessment proceedings assessee revised the working of loss for the purposes of Section 205(1)(b) to Rs. 48,960.90 lakhs by making an adjustment of Rs. 8017.40 lakhs for 1983-84 lakhs as under.
We shall refer to this chart hereinafter as Schedule 'B' : 3. The company had earned a profit in several assessment years of Rs. 50,636.31 as per Schedule 'C' below : 4. The Assessing Officer was of the view that the loss suffered by the assessee in earlier years had already been absorbed and as such no adjustment was permissible under Section 205(1)(b) of the Companies Act, 1956. He relied upon Circular No. 495 dated 22nd September, 1987 of CBDT para 36.5 in this behalf. A sum of Rs. 568.75 lakhs was adjusted by the Assessing Officer in accordance with Clause (1) of Second proviso to subSection (1A) of Section 115J and the book profits at Rs. 35,271.32 lakhs computed. 30% of the book profits has been worked out at Rs. 10,581.70 lakhs. Accordingly tax of Rs. 55,55,39,250 has been levied. Besides interest under Section 234B has also been charged at Rs. 13,32,64,404. Interest under Section 201(1 A) has been charged at Rs. 25,718. The CIT(A) has confirmed the order of the Assessing Officer under Section 115J. The levy of interest under Section 234B of the Income-tax Act, 1961 for assessee's failure to pay tax in advance has also been confirmed.
5. The Company is aggrieved. It is contended that under Section 115J a legal fiction is created to deem 30% of the book profits as income chargeable to tax. Some adjustments arc claimed to be permissible in arriving at the book profits. By virtue of Explanation (iv) to Section 115J(1) the book profits are claimed to be reduced by the amount of loss or amount of depreciation, whichever is less in the same manner as if Clause (b) of First Proviso to Section 205(1) of the Companies Act, 1956 is applicable. Shri Harish Salve explained the background against which adjustment of lower of the loss or the amount of deoreciation was permitted against the profits of the year as if the provisions of Clause (b) of the First Proviso to Sub-section (1) of Section 205 of the Companies Act, 1956 are applicable. According to the learned counsel when Section 115J was proposed in the Finance Bill of 1987, the adjustments permissible under the Companies Act, 1956 did not find place in the Section. During the discussion on the Bill Amendment was proposed by accepting the representations that loss or depreciation whichever was lower permissible to be adjusted under Section 205(1)(b) should also be allowed to be set off in order to work out the book profit for the purposes of levy of minimum tax on 30% of book profits under Section 115J. He referred 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 (i)(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 that assessee is entitled to adjustment of loss/depreciation for the year in appeal against book profits and the fact that assessee company has earned a profit in some of the years will not come in the way of the assessee company for adjustment of such loss/depreciation. Shri Salve has relied upon following authorities in support of the contention that strict interpretation of the provisions of the Act is warranted and no violence to the words is permissible : 3. CIT v. T.V. Sundaram Iyengar & Sons (R) Ltd. [1975] 101 ITR 764 (SC) According to Shri Salve the Circular issued by the CBDT is not in consonance with the intention of the legislature nor is it in consonance with the plain language used in Section 115J of the Income-tax Act, 1961 read with Section 205 of the Companies Act, 1956.
Shri Salve has accordingly urged for cancellation of demand created under Section 115J of the Income-tax Act, 1961.
6. With regard to assessee's liability under Section 234B of the Income-tax Act, 1961, the learned counsel contended that assessee was not liable to pay any advance tax as the current income of the assessee was not more than the income on which advance tax is due. According to Shri Salve Section 115J is attracted only when the Assessing Officer finds that the profits of the assessee are less than 30% of the book profits. According to learned counsel, a legal fiction is created for the limited purpose of levy of minimum tax. Legal fiction cannot extend beyond the levy of tax, it was contended. Shri Salve pleaded that Section 115J provides for computation of tax on book profits and not for computation of total income of the assessee. It was accordingly pleaded that Section 234B is inapplicable to the facts of this case.
Shri Salve accordingly pleaded for cancellation of levy of interest.
7. According to the learned Departmental Counsel Shri Rajendra there is no dispute about assessee's right to make adjustment permissible under Section 205(1)(b) of the Companies Act, 1956 in order to work out the book profits as provided in Section 115J. However, the dispute is stated to be regarding the manner and the extent of adjustment.
According to Shri Rajendra, assessee had suffered loss in some of the years and 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 corner 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 for some of the earlier years, loss suffered in other years is bound to be adjusted against those profits and if any loss is left unadjusted that can be adjusted against the profits of the year, it was further pleaded that even if it is assumed that the assessee had option to adjust the loss for earlier years against the profits for the current year or against the profits for the earlier years, the assessee having adjusted the loss against the earlier years, it had no right to reverse the option in order to defeat the provisions of Section 115J.8. Referring to the contention of the learned counsel for the assessee that where two interpretations were possible, one favourable to the assessee should be adopted, learned counsel cited the decision of the Punjab and Haryana High Court in Nandlal Sohanlal v. CIT [1977] 110 ITR 170 (Punj. & Har.) (FB) wherein it was held that where two interpretations were possible, the one which is reasonable and in consonance with legislative intention should be adopted. According to the learned counsel for the revenue, the decision of the Hon'ble Supreme Court in the case of CWT v. Kripashankar Dayashanker Worah [1971] 81 ITR 763 (SC) has been considered by the Punjab and Haryana High Court. According to Shri Rajendra, keeping in view the legislative intention, the only reasonable interpretation of Section 205 of the Companies Act would be that assessee is entitled to set off of unabsorbed depreciation/loss of earlier years against the profits of the year. However, where the assessee has earned profits in earlier years, it would be obligatory for it to adjust the loss/unabsorbed depreciation against profits for those years and in the case of any shortfall the assessee would be entitled to set off the same against the profits for the year. It was accordingly pleaded that the decision of the revenue authorities may be confirmed and liability of the assessee under Section 115J upheld.9. With regard to levy of interest under Section 234, the learned counsel for the revenue contended that the assessee was conscious of its obligation under Section 115J and accordingly its failure to pay advance tax makes it liable to pay interest under Section 234.
According to Shri Rajendra, Section 234B has rightly been invoked and there is no merit in the contentions raised on behalf of the assessee that it is not attracted in this case. It was 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 from 1-4-1988 i.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 of any previous year is less than 30% of its book profits/the total income of such taxpayer chargeable to tax would be deemed to be the amount equal to 30% of such book profits. For the purpose of Section 115J every assessee company is required to prepare its profit and loss account in accordance with Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956). This is provided under Sub-section (2) of Section 115J. Book profits for the purposes of Section 115J have been defined by means of an Explanation provided under Section 115J. The said Explanation reads as under : Explanation- For the purposes of this Section, "book profits" 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 - 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,- (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.
As is clear from the above Explanation assessce is entitled to adjustment of lower of the loss or depreciation as may be permissible under Clause (b) of First Proviso to Section 205 of the Companies Act, 1956. It may be pertinent to mention that while introducing the Finance Bill of 1987 the adjustment permissible under Section 205 of the Companies Act, 1956 for loss or unabsorbed depreciation, whichever is less was not proposed to be set off against the book profits of the company. It seems, during the course of consideration of the Bill, representations had been received on the basis of which the adjustment as permissible under Section 205 of the Companies Act, 1956 was also adopted for adjustment in arriving at the book profits of the company for the purposes of Section 115J. This fact is clear from the speech of the Prime Minister and Minister of Finance while moving the Finance Bill of 1987 for consideration of Lok Sabha on 29th April, 1987. We quote from the 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 corner, 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 allowance reserve and adjustment of brought forward losses from previous year, net profit carried forward to the balance sheet is at Rs. 23,662.50 lakhs. The ITO has computed the book profits by taking the profit at Rs. 35,840.07 and by giving an allowance of Rs. 568.75 lakhs under Clause (i) of Second proviso to Sub-section (1 A) of Section 115J. The appellant's case is that it is entitled to set off of loss/depreciation whichever is less in respect of all the assessment years from 1960-61 onwards as per Schedule 'A' referred to in this order. According to the assessee, the said loss/depreciation, whichever is less is to be adjusted against the current year's profit and not against the profits earned in some of the years as per Schedule 'C'. Assessee's case is that Section 205(1)(b) of the Companies Act, 1956 gives the option to either to adjust this loss/depreciation against the profits of the current year or against the profits of the previous year or against both. Once the option is available to the assessee, it is permissible to adjust the said loss/depreciation against the profits of the current year and not necessarily against the profits of earlier years. In order to appreciate the contention on behalf of the assessee, we would like to reproduce Section 205 of the Companies Act, 1956 as is relevant to the subject in appeal: 205. (1) No dividend shall be declared or paid by a company for any financial year except out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of Sub-section (2) or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with those provisions and remaining undistributed or out of both or out of moneys provided by the Central Government or a State Government for the payment of dividend in pursuance of a guarantee given by that Government: (a) if the company has not provided for depreciation for any previous financial year or years which falls or fall after the commencement of the Companies (Amendment) Act, 1960, it shall before declaring or paying dividend for any financial year provide for such depreciation out of the profits of that financial year or out of the profits of any other previous financial year or years; (b) if the company has incurred any loss 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 thinks 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 analyse Clause (b) of the First Proviso to Section 205(1) quoted above. As per the proviso quoted above, where the company has suffered any loss in any previous financial year or years which fall after the commencing of Companies Act, 1956, then (a) the amount of loss or the 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; (b) against the profits of the company for any previous financial year or years arrived at in both cases after providing depreciation in accordance with proviso to subSection (2); 13. In this case the company has incurred losses in previous financial years falling after the commencement of Companies (Amendment) Act, 1956 (though the company was incorporated with effect from 1973 the losses suffered by the dissolved companies arc deemed to be the losses or unabsorbed depreciation of this company by virtue of Clause 6 of Public Sector Iron and Steel Companies (Restructuring) and Miscellaneous Provisions Act, 1978]. The real question in dispute is as to whether Clause (b) of First Proviso to Section 205(1) permits adjustment of such loss/unabsorbed depreciation against the profits of the company for the current year and as to whether the company is permitted to ignore the profits earned in previous financial years. In our view, there is no ambiguity in Clause (b) of the first Proviso to Section 205(1) of the Companies Act, 1956 insofar as the Legislature has taken into account three eventualities; namely : (A) The company may have incurred losses in any previous financial year or years and in the first year of profit Clause (b) of the first proviso to Section 205 permits adjustment of such loss or amount of depreciation, whichever is less, to be set off against the profits of the company for the current year.
(B) Second eventuality, that in our view has been taken into account, is that the company may have suffered losses in some of the previous years and earned profits in some of the years, as in the case of the present company. In such eventuality Clause (b) to first proviso to Section 205(1) permits adjustment of such loss/depreciation, whichever is less, against the profits of the previous financial years.
(C) The third 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, thatremains 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 company to the extent of Rs. 56,636.31 lakhs which amount is sufficient to absorb a loss of Rs. 48,960.90 lakhs as per Schedule 'A' no further adjustment is permissible to the Company against the profits of the current year under Clause (b) to First Proviso to Section 205(1) of the Companies Act, 1956. We may point out that assessee has earned a profit of Rs. 6,326.99 lakhs in the immediately preceding year which we are not taking into account as the profits earned in earlier years are sufficient to absorb the losses or depreciation of some of the years.
14. Though we are of the opinion that assessee had no option but to adjust the loss/depreciation, whichever is less against the profits of the previous years yet we may consider the consequences of such option even if it were available to the assessee. According to the assessee the adjustment under Clause (b) of the First proviso to Section 205(1) of the Companies Act, 1956 can be made against the profits of the current year in preference to the profits earned in previous years. A crucial question that arises for consideration is as to when docs Section 205 of the Companies Act, 1956 get attracted. Docs Section 205 come into operation in every year of profit on the basis of which dividends could be declared or does it get attracted in any year at the option of the assessee. In our view, Clause (b) of the First proviso to Section 205 of the Companies Act, 1956 shall have to be applied in each year in which the company has earned profits in which dividend could be declared. If that is done, the entire adjustment permissible under Clause (b) of First proviso to Section 205(1) would be exhausted by the beginning of assessment year 1988-89 and there would be no loss or unabsorbed depreciation available for adjustment under the said proviso. Section 205 has been incorporated in the Companies Act in order to ensure that no company pays dividends out of its capital.
Under Section 115J of the Income-tax Act adjustment permissible under Clause (h) of First Proviso to Section 205 of the Companies Act has been incorporated to accommodate the companies just having come out of red. Such an adjustment was not incorporated to defeat the intention of the Legislature to impose tax on 30% of the book profits of the Companies which have not only having recovered the losses but are making huge profits.
15. If the interpretation 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(1 A) 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 1956). 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 the profits earned as per Schedule 'C' of this order in arriving at the permissible adjustment under proviso (b) to Section 205(1) of the Companies Act, 1956, is not well founded. Though we are of the view that the language of Clause (b) of First Proviso to Section 205(1) of the Companies Act, 1956 is unambiguous yet even if there is any absurdity it has to be construed in such a way that such absurdity and mischief is avoided. In the case of K.P. Varghese v. ITO [1981] 131 ITR 597 their Lordships of the Supreme Court has held as under : A statutory provision must be so construed, if possible, that absurdity and mischief may be avoided. Where the plain literal interpretation of a statutory provision produces a manifestly absurd and 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.
Keeping in view the decision of the Hon'ble Supreme Court referred to above, we would also like to consider the intention of the Legislature in incorporating the relevant provisions of law. We may point out that speeches made by the Members of Legislature on the Floor of the House when the Bill is being debated are inadmissible for the purposes of interpreting the statutory provision but the speech made by the mover of the Bill explaining reason for its introduction can certainly be referred to for the purposes of ascertaining the mischief sought to be remedied by the Legislature and the object and purpose for which, the legislation is enacted. We may quote from the Budget Speech of the Prime Minister and the Minister of Finance on 28th February, 1987, para 80 as under : It is only fair and proper that the prosperous should pay at least some tax. The phenomenon of so-called "zero-tax" highly profitable companies deserves attention. In 1983, a new Section 80VVA was inserted in the Act so that all profitable companies pay some tax.
This docs not seem to have helped and is being withdrawn. I now propose to introduce a provision whereby every company will have to pay a "minim urn corporate tax" on the profits declared by it in its own accounts. Under this new provision, a company will pay tax on at least 30% of its book profit. In other words, a domestic widely held company will 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 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, 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 incomes 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 computation of the book profit. Thirty per cent of such 'book profit' shall be treated as total income of the company to which the provisions of this new chapter (Section 115J) apply.
It has also been provided that the aforesaid provisions shall not affect determination of the amount to be carried forward to the subsequent years under the provisions of Sections 32(2), 32A(3), 72,73,74,74A and 80J relating to unabsorbed depreciation, unabsorbed investment allowance, unabsorbed loss and unabsorbed deduction relating to tax holiday.
As a consequential amendment, Chapter VIB of the Income-tax Act relating to restriction on certain deductions in the case of companies, is proposed to be omitted.
These amendments will take effect from 1 st April, 1988 and will, accordingly, apply in relation to the assessment year 1988-89 and subsequent years (Clauses 40 and 43).
While proposing the amendment in Section 115J the Prime Minister and the Minister of Finance in his speech on 29th February, 1987 said as under: In respect of direct taxes, I propose to make the following amendments: (b) 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 corner, 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 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 counsel for the assessee that in the case of tax statute, strict interpretation is warranted, are of no consequence as we have not done any mischief to the language used in the statute. We have simply interpreted the provisions of the law and the reference to the legislative intent is by way of guidance which we have derived in order to interpret the relevant provisions of law.
We may now refer to the decision cited by the learned counsel in respect of interpretation of statute. In Sodra Devi's case (supra) the Hon'ble Supreme Court has held that unless there is any ambiguity in the words used in the statute it is not open to the Court to depart from the normal rule of construction, which is that the intention of the Legislature should be primarily gathered from the words which are used. This decision of the Hon'ble Supreme Court docs not in any way support the contention on behalf of the assessee. In the case of R..
Kanakasabai (supra) their Lordships of the Supreme Court have held that if a taxing provision is ambiguous the interpretation which is beneficial to the subject must be adopted. In view of our finding that there is no ambiguity in the relevant provisions of law this decision does not apply to the facts of this case.
19. In the case of CIT v. T.V. Sundaram lyengar & Sons (P.) Ltd. [1975] 101 ITR 764 (SC) it was held by their Lordships of the Supreme Court that if the language of the statute is clear and unambiguous and if two interpretations are not reasonably possible, it would be wrong to discard the plain meaning of the words used in order to meet possible injustice. In the case of CST v. Auraiya Chamber of Commerce [1987] 167 ITR 458, their Lordships of the Supreme Court held that even in a fiscal statute, equity should prevail whenever the language permits.
20. In our view, none of the decisions cited above support assessee's case. We have interpreted Clause (b) of the First Proviso to Section 205(1) of the Companies Act, 1956 read with Section 115J of the Income-tax Act, 1961 in consonance with the legislative intent. We have not modified the language used by the Legislature though it is permissible by virtue of the decision of the Hon'ble Supreme Court in the case of K.P. Varghese (supra). The interpretation sought by the assessee would produce absurd results and we would be permitting mischief so as to render Section 115J redundant in the case of some of the companies 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 from 1-4-1988 by 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 234 B. 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: Tax shall be payable in advance during any financial year, in accordance with the provisions of Sections 208 to 219 (both inclusive), in respect of the total income of the assessee which would be chargeable to tax for the assessment year immediately following that financial year, such income being hereafter in this Chapter referred to as 'current income'.
Section 208 makes it obligatory for every assessee to pay advance tax where the amount of such tax payable by the assessee during any year as computed in accordance with the provisions of Chapter relating to advance tax is Rs. 1500 or more.
22. Section 209 provides the basis for calculation of amount of advance tax payable by an assessee.- Section 209(a) which is relevant is quoted hereunder for ready reference : 209. The amount of advance tax payable by an assessee in the financial year shall, subject to the provisions of Sub-sections (2) and (3) be computed as follows, namely:- Where the calculation made by the assessee for the purposes of payment of advance tax under Sub-section (1) or Sub-section (2) or Sub-section (5) or Sub-section (6) of Section 210, he shall first estimate his current income and income-tax thereon shall be calculated at the rates in force in the financial year.
23. As is evident from above provisions relating to computation and payment of advance tax assessee has to estimate his current income which is chargeable to tax in accordance with provisions of the Income-tax Act, 1961. As is clear from the facts in this case the total income of the assessee computed in accordance with the Act was determined at nil. Section 115J, however, has created a fiction in such cases for payment of tax in respect of 30% of book profits as adjusted in accordance with the said Section. In order to consider as to whether the assessee is liable to tax under Section 115J the basis is the book profits shown in the accounts of the previous year as adjusted under Section 115J. Advance tax is to be paid before the close of the previous year. The total income and the current income in respect of which advance tax is payable is the income as defined in Section 2(45) and Section 207 respectively. The concept of total income and current income is the income computed under different heads specified in the Act of 1961. Section 115J purports to tax an amount which has never been computed in accordance with any other provisions of the Act. The legal fiction created under Section 115J by which the total income is deemed to be 30% of the book profits, applies only for purposes of Section 115J and it docs 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 completed, i.e., after the expiry of the year. Therefore, in our view, the fiction created under Section 115J does not extend to the payment of advance tax under the provisions of Sections 207 to 219 of the Income-tax Act, 1961.
24. In the case of CIT v. Mother India Refrigeration Industries (P.) Ltd. [1985] 155 ITR 711 at page 718 the Hon'ble Supreme Court referred to its own decision with approval in the case of Bengal Immunity Company Ltd. v. State of Bihar [1955] 2 SCR 603, 606; 6 STC 446, where it was held that the legal fictions are created only for some definite purposes and these must be limited to that purpose and should not be extended beyond that legitimate field. The purpose of creating a legal fiction under Section 115J is to levy tax in respect of the companies whose book profits computed in accordance with the provisions of the Act of 1961 are less than 30%. The legal fiction does not, in our view, extend to the payment of advance tax. We are accordingly of the view that assessee is not liable to interest under Section 234B.25. The view taken by the revenue may be a possible view. The argument that "under Section 115J fiction has been created for deeming 30% of the book profits as income chargeable to tax. The character of the income deemed to be chargeable to tax would ultimately be the income assessed in accordance with the Act. For the purposes of payment of advance tax assessee is expected to estimate the income and therefore, there would be no necessity for the assessee to wait for the completion of the books of account. Accordingly, the assessee was as well liable to pay tax in advance on the deemed income in accordance with Sections 207 to 219," may seem to be attractive. However, considering the fact that the liability of the assessee is by means of a Fiction created under Section 115J and the fact that the assessee but for these provisions would not have been liable to pay any tax, we are of the considered view that former view expressed by us is more reasonable and equitable. Moreover, it is well settled that where two reasonable views are possible, the one favourable to the assessee should be adopted.
Considering the totality of the facts and circumstances of this case, we hold that assessee is not liable to pay interest under Section 234B.The levy of interest under Section 234B is accordingly deleted.