1999 (4) TMI 5 - SC - Income Tax

Companies must include depreciation when calculating 'loss' under section 115J for minimum corporate tax computation

The SC interpreted 'loss' in section 205(1), first proviso, clause (b) of the Companies Act, 1956, as incorporated into section 115J of the Income-tax ... Interpretation of the term 'loss' in section 205(1), first proviso, clause (b), of the Companies Act, 1956, read with section 115J of the Income-tax Act, 1961 - Computation of book profit - Unabsorbed depreciation - Finance Minister's speech, for statutory interpretation - phenomenon of so called 'zero tax' companies. HELD THAT:- In the Budget Speech of 1987, the Minister of Finance referring to the proposed section 115J explained the rationale behind its introduction in these words: '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 This does not seem to have helped and is being withdrawn. I now propose to introduce a provision whereby every company will have to pay a 'minimum 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 per cent. of its book profit... This measure will yield a revenue gain of approximately Rs. 75 crores.' The Finance Minister introduced an amendment during the passage of the Finance Bill and said : 'The Finance Bill inserts a new section 115J in the Income-tax Act, 1961, 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............' This court ascertained the object behind the legislation and held that the provisions of section 205 quoted hereinabove stand bodily lifted and incorporated into the body of section 115J of the Income-tax Act, all that we have to do is to read the provisions plainly and apply the rules of interpretation if any ambiguity survives. Section 205(1), proviso clause (b) of the Companies Act brings out the unabsorbed portion of the amount of depreciation already provided for computing the loss for the year. The words 'the amount provided for depreciation' and 'arrived at in both cases after providing for depreciation' make it abundantly clear that in this clause 'loss' refers to the amount of loss arrived at after taking into account the amount of depreciation provided in the profit and loss account. We are of the opinion that the term 'loss' as occurring in clause (b) of the proviso to section. 205(1) of the Companies Act has to be understood and read as the amount arrived at after taking into account the depreciation. Then alone the formula prescribed in this clause would make sense and it would be consistent with the object sought to be achieved by enacting section 115J of the Income-tax Act, 1961. If 'loss' were to be taken as pre-depreciation loss then the resultant computation will not be in conformity with the tenor of the provisions of section 205. The language of clause (b) of the proviso to section 205(1) is clear. It applies to those cases where the depreciation has been provided in accordance with the provisions of sub-section (1) of section 205. The depreciation is provided for in the profit and loss account. The loss is arrived at after taking into account the depreciation provided. It is therefore clear that the word 'loss' as used in the proviso clause (b) to section 205(1) signifies the amount arrived at after taking into account the amount of depreciation and it has to be so read and understood in the context of section 115J of the Income-tax Act, 1961. We do not agree with the view taken by the High Court that in case there is profit in a year but after adjustment of depreciation it results in loss, no adjustment in the book profit under section 115J can be allowed. The view taken by the High Court would partially defeat the object sought to be achieved by section 115J of the Income-tax Act, 1961. We also do not agree with. the High Court saying that having lifted section 205(1), proviso clause (b), from the Companies Act into section 115J of the Income-tax Act, there is no occasion to refer to the Companies Act, 1956, at all. ISSUES PRESENTED and CONSIDEREDThe core legal issue considered in this judgment is whether the term 'loss' as used in section 205(1), first proviso, clause (b), of the Companies Act, 1956, when read with section 115J of the Income-tax Act, 1961, includes 'depreciation.'ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsThe legal framework involves section 115J of the Income-tax Act, 1961, which was introduced to ensure that companies with substantial profits pay a minimum tax, and section 205 of the Companies Act, 1956, which deals with the declaration of dividends only out of profits after providing for depreciation. The interpretation of the term 'loss' in these provisions is central to the case.Court's Interpretation and ReasoningThe Court examined the legislative intent behind section 115J, which was to impose a minimum tax on companies declaring profits in their accounts but not paying taxes due to adjustments like depreciation. The Court noted that the term 'loss' in section 205(1), proviso clause (b), of the Companies Act should be interpreted in a manner consistent with its use in the Companies Act, which includes depreciation.Key Evidence and FindingsThe Court referred to the Finance Minister's Budget Speech and subsequent amendments to section 115J, which indicated that the provision aimed to address zero-tax companies and ensure they paid a minimum tax. The Court also considered established corporate practices and accounting principles that include depreciation in the calculation of loss.Application of Law to FactsThe Court applied the interpretation that 'loss' includes depreciation to the facts of the case. It concluded that the assessee could deduct the unabsorbed depreciation when calculating book profits under section 115J, contrary to the High Court's ruling. This interpretation aligns with the legislative intent to allow companies to set off past losses or unabsorbed depreciation against current profits for tax purposes.Treatment of Competing ArgumentsThe Court addressed the competing arguments by examining the statutory language, legislative history, and accounting practices. It rejected the High Court's narrower interpretation, which excluded depreciation from 'loss,' as it would undermine the purpose of section 115J and contradict the Companies Act's provisions.ConclusionsThe Court concluded that the term 'loss' in section 205(1), proviso clause (b), of the Companies Act, as incorporated into section 115J of the Income-tax Act, includes depreciation. This interpretation ensures the provision's consistency with its legislative purpose and the broader statutory context.SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning'We are of the opinion that the term 'loss' as occurring in clause (b) of the proviso to section 205(1) of the Companies Act has to be understood and read as the amount arrived at after taking into account the depreciation.'Core Principles EstablishedThe Court established that when interpreting statutes, the legislative intent and purpose should guide the understanding of terms. The incorporation of provisions from one statute into another should maintain the original meaning and context.Final Determinations on Each IssueThe Court overturned the High Court's decision, allowing the appeals filed by the assessees. It held that the term 'loss' includes depreciation, and companies can adjust their book profits accordingly under section 115J of the Income-tax Act.The appeals by the Revenue were dismissed, affirming the Court's interpretation and application of the relevant statutory provisions.