1. This appeal relates to the application of the provisions of Section 115J in determining the assessable income of the assessee.
2. The assessee is a company wholly owned by the Government of Tamil Nadu and carrying on business in the manufacture of cement and asbestos. For the assessment year 1988-89, corresponding to the previous year ended 31-3-1988, the assessee filed a return showing nil income. The Assessing Officer accepted the fact that the total income computed in accordance with the IT Act came to nil. However, he found that the profit shown in the profit & loss account came to Rs. 2,95,14,482. Adding back the provision for bad and doubtful debts and another provision of Rs. 30,71,224 for shortfall in levy quota, he determined the book profit at Rs. 3,32,23,376. He then noted that under Section 115J, the brought forward business loss or brought forward depreciation, whichever is less, is to be deducted and since the brought forward business loss was nil, no deduction was to be made therefor. He accordingly determined the total income at 30 per cent of the adjusted book profit, i.e., Rs. 99,67,013. The assessee appealed and pointed out that the adjustments made to the book profits were not justified as both the provisions added back were accrued liabilities.
It was also contended that the unabsorbed depreciation of the earlier years must be set off under the provisions of Section 115J. The CIT (Appeals) accepted the first contention that the two provisions added back by the Assessing Officer were to be excluded. However, he rejected the second contention on the ground that the word 'loss' in the expression 'loss or depreciation whichever is less' refer only to loss exclusive of depreciation', following the decision of the Hyderabad Bench of the Tribunal in V. V. Trans-Investments (P.) Ltd. v. YTO 11992] 42 ITD 242.
3. In the further appeal before us, it was pointed out on behalf of the assessee that the decision of the Hyderabad Bench of the Tribunal has been overruled by the Special Bench of the Tribunal in the case of Surana Steels (P.) Ltd. v. Dy. CIT [ 1993] 201 ITR (AT) 1 where it was held that the word "loss" in the phrase "loss or depreciation whichever is less" in Explanation (iv) to Section 115J refers only to the net loss after deduction of depreciation so that the assessee-company whose income is computed under Section 115J is entitled to deduct unabsorbed depreciation of the earlier years even if there was a profit before deduction of such depreciation in the earlier years. It was then pointed out by the revenue that in a Writ Petition against that decision, the Andhra Pradesh High Court had suspended the operation of the order (vide order dated 29-4-1993 in Writ Misc. Petition No. 6911 of 1993 in W.P. No. 5408 of 1993). We found that the Writ Petition has been filed against the order of the Tribunal (which has considered all the arguments advanced by the revenue and discussed the entire matter) on the only ground that the opportunity given to the revenue was inadequate. We, therefore, considered that this case should be proceeded with after giving a further opportunity to the revenue, to take such contentions as the revenue may wish, to argue that the reasons given by the Special Bench in its decision required re-consideration. Therefore, an interim order was passed on 3-8-1993 specifically drawing the attention of the revenue to the speech of the Hon'ble Finance Minister in the Lok Sabha on 29-4-1989 (165 ITR St.
354) accepting the plea for setting off the earlier years' losses in part and we observed: It is for the Revenue to produce before us any notings in the file put up to the Finance Minister before that assurance was given in the Lok Sabha to indicate that the intention of the Finance Minister was different from what it appears. We, therefore, deem it fit to grant 2 weeks time to the authorised representative of the Revenue to obtain instructions and if the Revenue does not produce any material in support of the contrary intention, we shall presume that the claim of the assessee is correct and allowable.
Thereafter, the matter was again adjourned for three subsequent dates at the request of the Revenue. At the time of the final hearing, a written submission dated 20-10-1993 has been filed on behalf of the Revenue stating that the notings in the departmental files are privileged documents, the production of which will be against public interest. It was also submitted that such noting cannot be regarded as an aid to the interpretation of the statute and the issue should be decided on the basis of published material. The assessee has also filed a written reply stating that this plea of the Revenue is misconceived and that the Departmental note would be a relevant material for understanding the scope of Section 115J.4. We have considered the submissions on both sides and in terms of our order dated 3-8-1993, we have to hold that in the absence of any material produced by the Revenue to show that the intention in introducing the Explanation to Section 115J was not different from that as understood by the Tribunal in the Special Bench decision cited above, it has to be presumed that the claim of the assessee is correct and is allowable.
5. Section 115J provides that where the total income as computed under the provisions of the Income-tax Act is less than 30 per cent of the book profit, the total income chargeable to tax shall be deemed to be the amount equal to 30 per cent of that book profit. The Explanation to that section defines "book profit" to mean the profit shown in the profit and loss account of the relevant previous year and provides for certain adjustments. When the Bill was pending, there were representations from the assessees that the taxation of the profit of a company which had incurred losses in the earlier years would be unfair.
The Finance Minister responded as follows in the Lok Sabha on 29-4-1989 (165 ITR (St.) 354) : 4. 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' on 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.
Thus item (iv) in the Explanation came to provide as follows for reducing the book profit 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.
Since this expression has been taken from the Companies Act, the word 'loss' occurring therein was understood only as net loss after depreciation. This has been discussed in elaborate detail in the decision of the Special Bench and it has been explained how this formula itself was meant to allow the unabsorbed depreciation alone as against business loss, i.e., the so-called cash loss in the profit and loss account. Obviously, when the Finance Minister mentioned, in the speech referred to above, that it was proposed to allow the same adjustment as available under the Companies Act, he was only accepting the plea of the assessee for a deduction only with reference to unabsorbed depreciation and not with reference to the entire loss including depreciation. It is because of this stated intention of the Hon'ble Finance Minister that we required the Revenue to produce before us the note prepared for him before he made the speech to understand whether he could have meant anything else. Obviously, such a note exists and it supports the case of the assessee. Otherwise, there is no reason why the Revenue should be reluctant to produce the same before us. It is well-settled that the claim of privilege is not meant for withholding evidence which will hinder the Government in the litigation. The Revenue has also not produced any material to show that the meaning of this expression was any different under the Companies Act. Moreover, it is a well-settled principle of interpretation that where a particular section of an Act is introduced into another statute, it has to be read in the sense which it bore in the original Act from which it is taken. Since the revenue is not able to demonstrate that this expression meant something different in the Companies Act and since the Hon'ble Finance Minister himself has stated in his speech that he intended to allow the same adjustment as available in the Companies Act, it is not possible to hold that the word loss' in this expression referred only to gross loss before depreciation.
6. The Revenue has pleaded privilege in respect of the note prepared for the Hon'ble Finance Minister on the basis of the decision of the Supreme Court in Doypack Systems (P.) Ltd. [1988] (2) SCC 299. That case related to the interpretation of the Constitution and the claim of privilege in respect of the advice given by the Cabinet. In the present case, we wanted to look into the note prepared for the Hon'ble Finance Minister on which the assurance in Parliament was given only to understand the scope of that assurance. The Supreme Court has held in the case of K.P. Varghese v. ITO [1981] 131 1TR 597 that the recent trend in juristic thought is that interpretation of a statute being an exercise in the ascertainment of meaning, everything which is logically relevant should be admissible. In the present case, we were only applying the mischief rule inasmuch as the assessees made representations that the determination of the book profit without adjustment of past years' results would be unfair and the Hon'ble Finance Minister introduced the amendment to allay that grievance.
Since he has done so with reference to the provisions of the Companies Act, it was very material to know the basis on which such assurance was given. As far as we can understand it, the provision in the Companies Act which itself was introduced subsequent to the introduction of the Companies Bill, devised a formula to adjust only unabsorbed depreciation ignoring cash loss. Since the assessees were pleading for deduction of both loss and depreciation, but the Hon'ble Finance Minister was not prepared to go the whole hog, it must have been decided by the Department to grant relief to the extent of unabsorbed depreciation only by adopting the same Companies Act formula. Once that decision was taken at the Minister's level, it is strange that the Department should go back on that assurance.
7. In the recent decision of the Supreme Court in the case of R.K.Jainv. Union of India [1993] (G5) ELT 305, it has been pointed out that the claim of privilege must be made with a sense of responsibility and an affidavit should generally be filed by the Minister concerned precisely stating the reasons or grounds for claim of immunity. In the present case, had such a procedure been followed, the Department would have been forced to bring this matter to the notice of the Hon'ble Finance Minister, and the latter would have certainly clarified what he meant while incorporating a provision of the Companies Act into the Income-tax Act, and particularly whether he intended to have that expression in the Companies Act to have quite a different meaning for the purpose of income-tax, even though he had stated that he wanted to give the same adjustment. This procedure was not followed and consequently the matter remained unreported to the Hon'ble Finance Minister.
8. In the circumstances, we are convinced that the note prepared for the Hon'ble Finance Minister for making the assurance in the Parliament was a relevant material for understanding the scope of Section 115J and since the Revenue has failed to produce the same in spite of specific opportunity, we hold that the interpretation placed by the assessee on the provisions of item (iv) of the Explanation to Section 115J is correct and has to be accepted.
9. Coming to the facts of the present case, the data in the Annexure 'A' hereto shows that for all the assessment years the net result of the business was a loss. In three assessment years, there was a cash profit but since the depreciation was more, the net result was still a loss. Clause (b) of Section 205(1) itself starts with the phrase "if the company has incurred any loss in any previous financial year" and thus refers only to a situation where the net result is a loss after setting off depreciation. Here, the contention of the assessee is that the comparison should be between the net result shown in column 3 and the depreciation shown in column 5, and that the lesser of these two should be allowed as deduction. On the other hand, the contention of the Revenue is that for the purpose of allowing deduction, the comparison should be between the cash profit or loss shown in column 4 and depreciation shown in column 5.
As we see it, the contention of the assessee is in consonance with the scheme of Section 205(l)(b) of the Companies Act. According to that section, wherever the earlier year's net result has been a loss, the Company is required to set off the entire loss or an amount equal to depreciation which was charged to the profit and loss account, whichever is less, before declaring dividend out of the current profit.
This formula, obviously, results in deducting only the unabsorbed depreciation in every case, and reveals the purpose behind the amendment itself. On the other hand, if the contention of the Revenue is adopted, no such uniform principle comes into play. Clearly, the section cannot be understood to give such a haphazard result in preference to the basis on which it could have a clearly defined underlying principle, viz., the intention to allow only unabsorbed depreciation as a deduction as against resultant loss. The Supreme Court has held in the case of G.M. Omer Khanv. CIT[ 1992] 196 ITR 269 that "it is necessary to avoid such an interpretation of the section which leads to anomalies and which will make it invalid. We have to adopt such a construction which will make the section valid and certain". On the basis of this underlying principle, the unabsorbed depreciation of Rs. 1372.50 lakhs has to be set off against the current profit of Rs. 2,95,14,482. Since the resultant figure is a negative figure, the adjusted book profit under the Explanation to Section 115J will be nil and the assessee's total income has to be determined at nil.
10. Curiously, on the facts here, the total amount of deduction in either case exceeds the current profit of Rs. 2 crores 95 lakhs. This itself indicates that the Income-tax Officer had not applied his mind even to the comparison put forward by the revenue.
11. We, therefore, set aside the orders of the authorities below and direct the Assessing Officer to refrain from applying the provisions of Section 115J while recomputing the income of the assessee.
TAMIL NADU CEMENTS CORPORATION LIMITED, ITA NO. 3159/1992 Total loss or depreciationPrevious Assessment Loss Cash Depreciation Loss or Cash Loss year year Profit/ Depreda- or Depredation, 1 2 3 4 5 6 7 (3/5) (4/5)31-03-1978 1978-79 64.11 (-) 3.14 60.97 60.97 3.1431-03-1979 1979-80 31.33 (+) 23.57 54.90 31.33 -31-03-1980 1980-81 728.54 (-) 528.88 199.66 199.66 199.6631-03-1981 1981-82 306.46 (-) 28.82 277.64 277.64 28.8231-03-1982 1982-83 393.45 (-) 112.85 280.60 280.60 112.8531-03-1985 1985-86 286.33 (+) 214.69 501.02 286.33 -31-03-1986 1986-87 235.97 (+) 214.94 450.91 235.97 -