2. There is only one ground raised in this appeal It relates to interpretation of the provisions of Section 115J(2) of the IT Act, 1961. The facts of the case in brief are as follows : 3. For the asst. yr. 1988-89, the assessee was originally assessed to an income of Rs. 39,39,228, after allowing deduction for the brought forward unabsorbed investment allowance of Rs. 54,76,236. It was subsequently found that the income assessable under Section 115J was Rs. 47,56,772 The assessment was therefore, rectified by bringing to tax the amount of Rs. 47,56,772. The AO also held that in view of provisions of Section 115J(2), there was no unabsorbed investment allowance to be earned forward, as the entire unabsorbed investment allowance brought forward from earlier years amounting to Rs. 54,76,276 got adjusted against the assessee's income as computed under normal provisions of the IT Act He held that unabsorbed investment allowance will not be carried forward since Section 115J(2) provided that carry forward of unabsorbed loss, unabsorbed investment allowance, etc would remain uneffected by the provisions of Section 115J(1) The assessee carried the matter to the CIT(A) The assessee's grievance was that with the income assessed at Rs. 47,56,772, brought forward unabsorbed investment allowance remained unadjusted to the extent of Rs. 8,17,544 as per the calculations given below:Total income 94,15,504 94,15,504Less Investment aUowance allowed 54,76,276 46,58,732Net income assessed 39,39,228 47,56,772 Balance unabsorbed investment allowance to be carried forward to subsequent years (54,76,276 - 46,58,732) = 8,17,544 4. The CIT(A) accepted the assessee's contention and allowed the assessee's claim. The Revenue is in appeal before us against the direction of the CIT(A) 5. The learned Departmental Representative stated before us that on the interpretation of Section 115J(2) there are two decisions in favour of the Revenue viz , the decision of the Hon'ble Andhra Pradesh High Court in the case of Suryalatha Spinning Mills Ltd v. Union of India and Anr.
(1997) 223 1TR 713 (AP) and the decision of the Hon'ble Karnataka High Court reported as Widia (India) Ltd v. CTT (2000) 242 ITR 678 (Kar). He conceded that there was a decision of the Hon'ble Gauhati High Court reported at Lallacherra Tea Co (P) Ltd v. C1T, which took the view in favour of the assessee. It was pleaded that in view of the decision of the Hon'ble Supreme Court in the case of Gurupad Khandappa Magdum v.Hirabai Khandappa Magdum and Ors. (1981) 129 ITR 440 (SC), interpretation which furthers the legislative intent ought to be accepted.
6. The learned authorised representative for the assessee relied upon the order of the CIT(A) and contended that the provisions of Section 115J(2) permitted carry forward of unabsorbed losses.
7. We have considered the rival submissions and have gone through the records. There is no doubt about the legislative intent underlying the provisions of Section 115J(2). This has been brought out m the Departmental Circular No. 495 dt 22nd Sept., 1987 which explains the provisions of Section 115J From the illustrations given in the said circular, it is clear that the provisions of Section 115J are intended not to effect the amounts of unabsorbed losses and other reliefs, which are required to be carried forward in the computation of income under the provisions of IT Act, other than Chapter XII-B which contains Section 115J. In our view, on plain reading of Section 115J(2), there is no doubt that the provisions of Section 115J would leave unaffected, the amounts of unabsorbed losses, unabsorbed depreciation and other unabsorbed reliefs, which are determined to be carried forward as per the normal computation under the other provisions of the IT Act Since, m the present case, entire unabsorbed investment allowance brought forward from earlier years was fully set off against the income as computed under the normal provisions of IT Act, in the computation made under Section 115J there will be no amount to be carried forward on account of any unabsorbed investment allowance Sec 115J contains a separate and special code of computation of income of certain companies, whose income as computed under the other provisions of IT Act was less than 30 per cent of the book profit We would, respectfully follow the ratio laid down m the aforesaid two decisions of the Hon'ble Andhra Pradesh High Court and Hon'ble Karnataka High Court The Revenue's appeal is accordingly allowed and the direction of the CIT(A) m regard to the carry forward of unabsorbed investment allowance is hereby cancelled.
9. I have carefully gone through the order proposed by my learned brother On careful consideration of the matter I could not persuade myself to agree with the finding given by the learned AM for the reasons given below 10. Facts of the case which I have gathered from an order passed under Section 154 of the IT Act for the assessment year under consideration, i e , 1988-89 is that the AO has found some error in the computation made under Section 115J by the assessee of Rs. 35,74,822 According to the AO if the correct income would be taken, then 30 per cent of the actual book profit works out to Rs. 47,56,772 Comparing this to the income determined in the regular course at Rs. 39,39,228 as per order dt 23rd July, 1992, it was found that the income computed under Section 115J was higher. In other words, the income computed under Section 115J was found greater than the income assessed, therefore, rectification was done and the income under Section 115J was computed as under:Profit as per P&L a/c 56,60,000Add (1) Amount carried to reserve 74,27,886(2) Amount of dividend proposed 44,88,188 1,70,76,074Less: Amount withdrawn from reserve 12,20,169Book profit 1,58,55,905 (However the total income computed under regular provisions of the Act as per assessment order dt. 23rd July, 1992 was at Rs. 39,39,228).
11. There is no controversy as far as these facts are concerned. The controversy has arosen in respect of the observation of the AO as per order under Section 154 according to which the assessee was not allowed to carry forward the investment allowance because, according to him, there is no such provision in Section 115J. The income was computed as per the other provisions of IT Act on an income of Rs. 39,39,228 after allowing deduction of Rs. 54,76,736. According to the AO the entire investment allowance brought down from earlier years amounting to Rs. 54,76,276 was totally adjusted against the income, computed under the normal provisions, hence nothing is left to be carried forward. For better understanding, at the cost of repetition, I reproduce the chart from the proposed order of my learned brother:Total Income 94,15,504 94,15,504Less: Investment allowance allowed 54,76,276 46,58,73239,39,228 47,56,772 (Balance unabsorbed investment allowance to be carried forward to subsequent years (54,76,276 - 46,58,732 - 8,17,544) 12. Hence, in a nutshell, the grievance of the assessee was that since the tax had been paid on an income of Rs. 47,56,772 under Section 115J wherein the investment allowance to the extent of Rs. 46,58,732 remained adjusted hence the balance figure of investment allowance of Rs. 8,17,544 should be allowed to be carried forward to subsequent years.
13. Learned brother is of the view that there is no scope of doubt about the legislative intent underlying the provisions of Section 115J(2). In his words, "a plain reading of Section 115J(2), there is no doubt that the provisions of Section 115J would leave unaffected the amounts of unabsorbed losses, unabsorbed depreciation and other unabsorbed reliefs which are determined to be carried forward as per the normal computation under the other provisions of IT Act". A Departmental Circular No. 495, dt. 22nd Sept., 1987 was also quoted.
Finally, he has relied upon the decision of Hon'ble Ahdhra Pradesh High Court in the case of Suryalatha Spinning Mills v. Union of India and Anr. (1997) 223 ITR 713 (AP) and the decision of Hon'ble Karnataka High Court in the case of Widia (India) Ltd. v. CIT (2000) 242 JTR 678 (Kar).
14. On the other hand, I am of the view that Section 115J does not provide that 30 per cent of the deemed income which is chargeable to tax shall also be liable for adjustment against allowances or losses which have been carried forward. Section 115J(2) merely provides that the provisions of Sub-section (1) shall not affect the determination of the amount relating to the relevant previous year to be carried forward to the subsequent year or years under the various provisions mentioned in the section. The very object of the provisions of Section 115J is to tax such companies which are making huge profits and declaring dividends, but are managing their affairs in such a way as to avoid payment of income-tax. Such companies are known as "prosperous zero tax companies" and the object of insertion of Section 115J was to ensure levy of minimum tax on the income determined under Sub-section (1) of Section 115J. Under the normal provisions of the Act an assessee is enabled to claim carry forward and set off of losses, unabsorbed allowances in view of specific provisions. But because of Section 115J a company has to pay 30 per cent of its book profit. Therefore, what is taxed is not fictional or hypothetical income. The income so derived to tax at 30 per cent comes out of the books of accounts of the assessee for the year under consideration, hence what is really done under Section 115J is not exactly bringing to tax hypothetical income. What is really done and defined in this provision is to limit or restrict or curtail deduction, carry-forward and set off of losses, unabsorbed depreciation, unabsorbed allowances, etc. The legislature thus charged tax on such companies which otherwise become "zero tax" companies under normal computation of income. Therefore, the section is not a deeming or fictional section but after curtailing certain advantages, tax the current income at a flat rate of tax. The calculation of tax at the flat rate is very much subjective and not hypothetical. Rather the income computed in the normal other section of IT Act is simply for comparison which has no effect on assessee as far as levy of tax is concerned. The income of the computation which is subject to tax under the law has to be taken into account for every purpose and not that computation which has relevance only for comparing the two figures. In other words, the income computed in the normal other provisions of the Act do not adversely effect a taxpayer as far as levy of tax is concerned and the same is used to work out only to ascertain the higher of the two calculation. Finally the taxpayer is affected by the income which is subject to tax and not the income which is not subject to tax.
Therefore, by plain analogy, for all practical purposes, that computation of income should be kept in mind on which tax is levied and not that computation which is not subject to tax. Therefore, for subsequent years such figures should be carried forward on which after adjustment tax has been paid. Hence, the assessee should be permitted to carry forward unabsorbed losses or unadjusted allowances of an amount equal to the taxed income. This opinion of mine gets support from the following orders : 15. Both the above High Courts have elaborately discussed the provisions of Section 115J and came to the conclusion that the amount which was taxed under Section 115J could not be adjusted against losses which have been carried forward While deciding this issue the Hon'ble Gauhati High Court has also quoted an example as follows: "Let us take a hypothetical example The income of 'X' company in a particular year was Rs. 100 and the company was having a carry forward loss of Rs. 70 After adjusting the above Rs. 70, the company shall be liable to pay tax on the balance of Rs. 30 But in the case if the carry forward loss would have been Rs. 100 m view of the provisions of Sub-section (1) of Section 115J the company will not be entitled to claim the 100 per cent deduction and will be liable to pay tax on Rs. 30 Thus after paying tax on Rs. 30 whether the entire carry forward losses of Rs. 100 will stand wiped off or whether only Rs. 70 shall stand adjusted and the balance of Rs. 30 may be carried forward for the next assessment year According to the Revenue, the entire Rs. 100 shall stand adjusted and the company shall also be liable to pay tax on Rs. 30 On the other hand, according to the assessee, as he is paying tax on Rs. 30 such amount of Rs. 30 cannot be adjusted against his carry forward losses If the proposition of the Revenue is accepted in that case the assessee will be definitely affected adversely as the amount on which he has paid tax shall also stand adjusted against his carry forward losses".
16. Moreover, it is also a settled law that the decisions which are beneficial to the assessee should be followed as it was held in the case of CIT v. Vegetable Products (1973) 88 ITR 192 (SC) and CIT v.Kullu Valley Transport Co (1970) 77 ITR 518 (SC) Since, in the present case, the unabsorbed investment allowance brought forward from earlier years was partly set off against the income computed under Section 115J, therefore, the balance amount which remained unabsorbed deserves to be carried forward for the subsequent years.
This appeal came before me as a Third Member to express my opinion on the following question: "Whether, on the facts and in the circumstances of the case, the assessee is entitled to carry forward the unabsorbed investment allowance to the extent it has not been set off against income assessed under Section 115J and consequently, whether the order of the CIT(A) on interpretation of the provisions of Section 115J(2) of the IT Act, 1961 should be confirmed?" 2. I have heard the rival submissions m the light of material placed before me and precedents relied upon For the relevant assessment year, assessee was originally assessed on an income of Rs. 39,39,228 after allowing deduction for the brought forward unabsorbed investment allowance of Rs. 54,76,236 Subsequently, it was found that the income assessable under Section 115J was Rs 47,56,772 AO rectified the assessment by resorting to the 154 proceedings Unabsorbed investment allowance was not allowed to be carried forward by the AO, as the entire unabsorbed investment allowance brought forward from earlier years amounting to Rs. 54,76,276 got adjusted against the assessee's income as computed under normal provisions of the IT Act.
3. The core of dispute was apropos the adjustment of the balance figure of investment allowance of Rs. 8,17,554, i.e, difference between the investment allowance allowed in normal course and as allowed under Section 115J According to the assessee, balance figure of investment allowance of Rs. 8,17,544 should be allowed to be carried forward to the subsequent years CIT(A) agreed with the contention of the assessee Appeal was allowed Revenue was in appeal before the Tribunal.
4. Learned AM adjudicated the issue by following the decision of the Hon'ble Andhra Pradesh High Court rendered in the case of Suryalatha Spinning Mills Ltd v. Union of India (1997) 223 ITR 713 (AP) and the decision of the Hon'ble Karnataka High Court in the case of Widia (India) Ltd v. CIT (2000) 242 ITR 678 (Kar). It was noted by the learned AM that the entire unabsorbed investment allowance brought forward from earlier years was fully set off against the income as computed under the normal provisions of the IT Act As such, in the computation made under Section 115J, there will be no amount to be carried forward on account of any unabsorbed investment allowance Learned AM has given the computation as per the normal course as well as the computation under Section 115J. Investment allowance of Rs. 54,76,276 was deducted from the total income. Net income came to Rs. 39,39,228 This income was computed in consonance with the procedure laid down under the Act. Thereafter, it is imperative on the part of AO to compute the income under Section 115J AO did that computation Resultant income was Rs. 47,56,772. As per the mandate of Section 115J, this income was to be assessed. Assessee pleaded that to the extent income computed under Section 115J got increased, it should be deemed that unabsorbed investment allowance was not adjusted against that income. As such, it should be carried forward. The submission of the assessee was that the tax would not have been demanded against the amount which was adjusted. Learned JM, following the decision of the Hon'ble Gauhati High Court rendered in the case of Lallacherra Tea Co (P) Ltd v. CIT (1999) 239 ITR 611 (Gau), decided the issue in favour of the assessee.
5. It is pertinent to note that now the issue involved in the present appeal stands covered by the decision of the apex Court rendered in the case of Karnataka Small Scale Industries Development Corporation Ltd v.CIT (2002) 258 JTR 770 (SC). In this case, Hon'ble Supreme Court overruled the decision of the Gauhati High Court rendered in the case of Lalla Cherra Tea Co. (P) Ltd. (supra) and approved the decision of Andhra Pradesh High Court in the case of Suryalatha Spg Mills Ltd. (supra) 6. It was held by the Hon'ble Supreme Court that the scheme under Section 115J for levying tax by considering 30 per cent of the book profits to be the deemed total income is an artificial process superimposed on the regular process of determination of the total income of the assessee in the usual manner. This section provides two stages, namely, (a) computation of income of the assessee under the IT Act in respect of the previous year, and (b) if the income as computed under the Act of that previous year is less than 30 per cent of its book profit, then the deemed total income of the assessee chargeable to tax for the previous year would be equal to 30 per cent of the book profit. Assessee is not required to pay tax on the figure of assessable income after deducting the amounts permissible under that Act, but on that account it cannot be said that the deductions are not taken into account. If the deductions had not, in fact, been allowed, the assessee would not have had an assessable income less than 30 per cent of its book profits entitling it to pay tax only on 30 per cent of its book profits. In deeming the total income to be 30 per cent of the profits, the deductions claimed are not ignored. These are necessary ingredients in the formula for applying the fictional income.
7. Having regard to the fact that the view taken by the learned AM is in conformity with the law laid down by the apex Court, I, respectfully following the decision of Hon'ble Supreme Court, agree with the view of the learned AM.8. The matter will now go before the regular Bench for deciding the appeal in accordance with the opinion of the majority.
In the appeal filed by the Revenue the following ground of appeal was raised : "On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that left out losses of earlier years due to application of Section 115J(1) are to be allowed to be carried forward and set off in subsequent years, ignoring the overriding provision of Section 115J(1) shall not effect the determination of amount in relation to relevant previous years to be carried forward to the subsequent years and thereby does not permit the carry forward of losses of earlier years." 2. On the difference of opinion between the AM and the JM, the issue arising out of this appeal was referred to the Third Member under Section 255(4) of the IT Act, 1961. The Third Member by his order dt.
28th Jan., 2003 agreed with the view expressed by the AM. In conformity with the opinion of the majority, the Revenue's appeal shall be treated as allowed. The order of the learned CIT(A) dt. 3rd May, 1993, on the issue raised by the Revenue is set aside and the order of the AO is restored.