2010 (9) TMI 18 - AT - Income Tax

Section 115JB (MAT) inapplicable to banking companies due to exemption under proviso to Section 211(2) of Companies Act

Krung Thai Bank PCL Versus Joint Director of Income Tax - International Taxation, Mumbai

ITAT, MUMBAI held that Section 115JB (MAT) is inapplicable to a banking company because MAT's computation starts from a profit & loss account prepared ... Re-opening of an assessment - Non application of provisions of MAT (minimum alternate tax) by the assessee - assessee contended that provisions of MAT are not applicable to it and therefore assessment cannot be reopened - Banking company - Held that:- The provisions of Section 115 JB can only come into play when the assessee is required to prepare its profit and loss account in accordance with the provisions of Part II and III of Schedule VI to the Companies Act. The starting point of computation of minimum alternate tax under section 115 JB is the result shown by such a profit and loss account. In the case of banking companies, however, the provisions of Schedule VI are not applicable in view of exemption set out under proviso to Section 211 (2) of the Companies Act. The final accounts of the banking companies are required to be prepared in accordance with the provisions of the Banking Regulation Act. The provisions of Section 115 JB cannot thus be applied to the case of a banking company. ISSUES PRESENTED AND CONSIDERED 1. Whether reassessment proceedings under section 147 of the Income Tax Act were validly initiated on the ground that income chargeable to tax had escaped assessment by reason of non-application of Minimum Alternate Tax under section 115JB. 2. Whether the provisions of section 115JB (Minimum Alternate Tax) can be applied to a banking company which prepares final accounts in accordance with the Banking Regulation Act and is exempted by the proviso to section 211(2) from preparing profit and loss account in terms of Part II and III of Schedule VI to the Companies Act. 3. Whether the absence of an express exclusion of banking companies from section 115JB precludes the court from holding that section 115JB is inapplicable where statutory accounting requirements (Schedule VI) do not apply. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of reassessment under section 147 where the only basis was assumed applicability of section 115JB Legal framework: Section 147 permits reopening of assessment if income chargeable to tax has escaped assessment; validity of reasons recorded must be legally sustainable and disclose a plausible cause to believe that income has escaped assessment. Precedent treatment: The Tribunal applied principles that reasons for reopening must be founded on a legally tenable premise; if the foundational legal premise (here applicability of section 115JB) is erroneous, reassessment is vitiated. Interpretation and reasoning: The Assessing Officer issued notice under section 147 solely on the assumed application of MAT (section 115JB) to the assessee and proposed addition only on that basis. Because the legal premise (that section 115JB applied) was incorrect (see Issue 2), the reasons recorded were insufficient and flawed. The Court treated the initiation of reassessment as contingent on a legal conclusion which, being unsustainable, rendered the reopening invalid. Ratio vs. Obiter: Ratio - where reopening is based exclusively on an incorrect legal premise about applicability of a tax provision, the reopening is invalid. Obiter - ancillary points on other facets of validity were not decided as academic. Conclusion: Reassessment proceedings under section 147 were quashed because the sole basis for reopening (application of section 115JB) did not withstand legal scrutiny. Issue 2 - Applicability of section 115JB (MAT) to a banking company exempted from Schedule VI accounts Legal framework: Section 115JB computes MAT beginning from the result shown by the profit and loss account prepared 'in terms of the provisions of Part II and III of Schedule VI to the Companies Act' as per section 115JB(2). The proviso to section 211(2) of the Companies Act exempts certain banking companies from preparing final accounts in conformity with Schedule VI; such banking companies prepare accounts under the Banking Regulation Act. Precedent treatment: The Court followed a view taken by a coordinate bench in a decision holding that MAT provisions could not be applied to entities (e.g., electricity companies) where Schedule VI accounting was not applicable for analogous reasons. That coordinate bench view was treated as persuasive and applicable by analogy. Interpretation and reasoning: Section 115JB's computation framework explicitly starts from a profit and loss account prepared according to Schedule VI. Where a statutory exemption (proviso to section 211(2)) displaces the requirement to prepare accounts under Schedule VI and prescribes a different statutory accounting regime (Banking Regulation Act), the foundational requirement for invoking section 115JB does not exist. The Court construed the statutory text literally: the MAT scheme presupposes the starting point of Schedule VI accounts; absent such accounts, section 115JB cannot be mechanically applied. The absence of an express exclusion for banking companies in section 115JB does not override the clear statutory condition that the P&L account be prepared under Schedule VI; thus, an implied application cannot be read in where the express starting point is absent. Ratio vs. Obiter: Ratio - Section 115JB is inapplicable to companies whose final accounts are not prepared in terms of Part II and III of Schedule VI by virtue of the proviso to section 211(2); where the statutory condition for computation under section 115JB is absent, MAT cannot be imposed. Obiter - observations on broader legislative intent or hypothetical scenarios where Schedule VI might apply were not necessary to the decision. Conclusion: Section 115JB (MAT) does not apply to a banking company exempted from Schedule VI requirements by the proviso to section 211(2), because the MAT computation specifically depends on a profit and loss account prepared in terms of Schedule VI and such accounts are not prepared by the banking company under the Banking Regulation Act. Issue 3 - Effect of absence of an express exclusion clause in section 115JB Legal framework: Statutory interpretation principles require that application of a taxing provision follow its express terms; absence of express exclusion is not ipso facto a basis to apply a provision where an express precondition for its operation is unmet. Precedent treatment: The Tribunal rejected the argument that lack of an express exclusion for banking companies mandated applicability; it relied instead on the specific statutory linkage in section 115JB to Schedule VI accounts and the Companies Act proviso exempting banks. Interpretation and reasoning: The Court held that one cannot infer applicability of section 115JB merely from the absence of express exclusion. Where the provision itself prescribes an antecedent condition (preparation of accounts in terms of Schedule VI), the absence of that condition precludes application. The plain wording of section 115JB(2) was dispositive; legislative silence on a special class does not override the statutory precondition that triggers MAT computation. Ratio vs. Obiter: Ratio - The absence of an express exclusion clause does not compel application of a tax provision where the provision's express operative condition (Schedule VI P&L) is not satisfied. Obiter - broader policy arguments about legislative intent were not accepted as overriding the statute's text. Conclusion: The absence of an explicit exclusion for banking companies in section 115JB does not render the provision applicable where the statutory condition for its operation (Schedule VI P&L) does not exist; accordingly the Assessing Officer erred in treating MAT as applicable. Overall Disposition Because the Assessing Officer's sole ground for reopening the assessment was premised upon an incorrect view that section 115JB applied, and because section 115JB is inapplicable where the profit and loss account is not prepared in terms of Schedule VI (as in the case of a banking company governed by the Banking Regulation Act and exempted by proviso to section 211(2)), the initiation of reassessment under section 147 was invalid and was quashed. Other grounds raised by the assessee were not adjudicated as academic in light of quashing the reassessment.