TaxTMI 
TaxTMI 
2013 (3) TMI 414
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....ion, shorn of the details, is that certain companies were liable to pay tax on their "book profit" if the total income computed in accordance with the provisions of the Act was less than 18% of its book profit. In that case, book profit was deemed to be the total income of such companies. These companies were required to prepare their profit and loss account in accordance with the provisions of parts -II and III of Schedule VI to the Companies Act, 1956. Explanation 1 to the section permitted certain adjustments to be made to the figure of book profit as shown in the profit and loss account prepared as per the Companies Act. The first part of the Explanation provided for certain additions to be made to the book profit and the second part provided for certain reductions to be made from the book profit. In the present petition we are not concerned with the second part, but are concerned only with the first part of Explanation 1 which provided for certain upward adjustments to the book profit. For the purposes of the present petition therefore, it would only be necessary to reproduce the first part of the Explanation, which reads as under: - "Explanation [1....
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.... for meeting an unascertained liability. The matter ultimately reached various benches of the Income Tax Appellate Tribunal and on account of the importance of the issue, a Special Bench of the Tribunal was constituted which ruled in JCIT v. Usha Martin Ltd. [2006] 105 TTJ (Kol.) 543 (SB) that such a provision cannot be considered as a provision for meeting an unascertained liability and that in truth and substance it was a provision for the diminution of the value of the debt and therefore, it fell outside clause (e) of the Explanation and the book profit cannot be increased by the amount of the provision. This view of the Special Bench of the Tribunal was upheld by the Delhi High Court in a case where a similar issue had arisen and this judgment is reported as CIT v. Eicher Ltd. [2006] 287 ITR 170. The controversy was eventually resolved by the Supreme Court in the judgment reported as CIT v. HCL Comnet Systems & Services Ltd. [2008] 305 ITR 409. This judgment was rendered on 23.09.2008. It was observed as under: - "For the purposes of section 115JA, the Assessing Officer can increase the net profit determined as per the profit and loss account prepared as per Parts II and III....
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.... "45. Amendment of section 115JB - In section 115JB of the Income-tax Act,- (a) in sub-section (1), with effect from the 1st day of April, 2010,- (i) for the words, figures and letters "the 1st day of April, 2007", the words, figures and letters "the 1st day of April, 2010" shall be substituted; (ii) for the words "ten per cent.", at both the places where they occur, the words "fifteen per cent." shall be substituted; (b) in sub-section (2), after the second proviso, in Explanation 1, after clause (h), for the words, brackets and letters "if any amount referred to in clauses (a) to (h) is debited to the profit and loss account, and as reduced by-", the following shall be substituted and shall be deemed to have been substituted with effect from the 1st day of April, 2001, namely:- "(....
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....book profits of a company. As per Explanation 1 after sub-section (2), the expression "book profit" means net profit as shown in the profit and loss account prepared in accordance with the provisions of Part-II and Part-III of Schedule-VI to the Companies Act, 1956 as increased or reduced by certain adjustments, as specified in that section. It is proposed to insert a new clause (i) in Explanation 1 after sub-section (2) of the said section so as to provide that if any provision for diminution in the value of any asset has been debited to the profit and loss account, it shall be added to the net profit as shown in the profit and loss account for the purpose of computation of book profit. Similar amendment is also proposed in section 115JA of the Income-tax Act by way of insertion of a new clause (g) in the Explanation after sub-section (2) of the said section. The amendment to section 115JA is proposed to be made effective retrospectively from 1st day of April, 1998 and will, accordingly, apply in relation to assessment year 1998-99 and subsequent years. The amendment to section 115JB is proposed to be made effective retrospectively from 1st day of April, 2001 and will,....
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....ers to the description of any of those clauses, the amount of the debit can be added to the book profit and the book profit shall stand increased by the said amount. The purpose of the Explanation is to broaden the base amount on which tax is payable by the company. No new levy is imposed. The tax-base stands widened by the amendment in as much as the amount or amounts set aside as provision for diminution in the value of any asset and debited to the profit and loss account shall be added to the book profit. It is well settled that income tax is only one tax on the total income of the assessee. The book profit of a company as shown in the profit and loss accounts prepared in accordance with the Companies Act, 1956 and as adjusted by the various clauses of Explanation 1 is deemed to be the total income of the company on which tax is payable. It is, therefore, a misnomer to refer to the amendment as imposing a new tax or levy. Since the amendment does not provide for any new levy of income tax, there is no question of it being struck down on the ground of retrospectivity. 9. The argument of the petitioner that no justification has been shown for introducing the amendment is also u....
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....fication given in the statement of objects and reasons for an amendment would invalidate the legislative action and would render the amendment unconstitutional on that ground alone. It would be relevant to refer to the judgment of the Supreme Court in Bakhtawar Trust & Ors. v. M.D. Narayan & Ors. [2003] 5 SCC 298. That was not a case where the statement of objects and reasons did not say anything with regard to the reason for the amendment. In that case it was urged that the statement of objects and reasons for the validation Act under challenge showed that the intention of the legislature was rather to render the decision of the High Court infructuous than to correct any infirmity in the legal position. Rejecting the argument, the court observed as under:- It was then urged on behalf of the respondents that a perusal of the Statement of Objects and Reasons for the Validation Act shows that the intention of the legislature was rather to render the decision of the High Court infructuous than to correct any infirmity in the legal position. For this, reliance was sought to be placed on the Statement of Objects and Reasons of the impugned enactment. It is well settled by the decisio....
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....ving regard to the judicially well-recognised limitations on the legislative powers. If the law offends any provision of the Constitution, it is liable to be struck down. Several other limitations on the legislative powers have been judicially recognised and the law has to fall within those limitations. The statement of objects and reasons may be looked into merely to ascertain the intention of the legislature, the mischief sought to be remedied, and the state of affairs prevailing prior to the amendment. It is thus only an external aid to construction and by no means a touchstone to judge the validity or constitutionality of the statute. That should be decided on the terms of the statute and the statement of objects and reasons can have no decisive influence on the question. Reading more into the statement of objects and reasons would lead to this absurd result, namely, that if sufficient justification for the law is shown in the statement of objects and reasons, then the law must be held to be valid and constitutional irrespective of the question whether it offends the relevant provisions of the Constitution or exceeds the judicially recognised limitations on the legislative powe....
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....ature competence to enact the law; or, it may be open to it to contend in the alternative that the restrictions imposed by the Act are so unreasonable that they should be struck down on the ground that they contravene his fundamental rights guaranteed under Art. 19(1)(f) & (g). This position cannot be, and has not been, disputed by Mr. Sastri who appears for the respondent, vide The State of West Bengal v. Subodh Gopal Bose MANU/SC/0018/1953 : [1954] 1 SCR 587, and Express Newspapers (Private) Ltd. v. The Union of India [1954] 12 S.C.R. 139.. 13. In view of the recent decisions of this Court Mr. Sastri also concedes that taxing statutes are not beyond the pale of the constitutional limitations prescribed by Articles 19 and 14. and he also concedes that the test of reasonableness prescribed by Art. 304(b) is justiciable. It is, of course, true that the power of taxing the people and their property is an essential attribute of the Government and Government may legitimately exercise the said power by reference to the objects to which it is applicable to the utmost extent to which Government thinks it expedient to do so. The objects to be taxed so long as they happen to be within th....
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....uthorities had sought to include the said provision in the book profit. Their attempt failed right up to the Supreme Court which pointed out that a provision for bad and doubtful debts is in fact a provision for diminution in the value of an asset which does not fall under clause (c) of Explanation 1. Having had the benefit of the view expressed by the highest court of the land and realising that the existing clause (c) in the Explanation was inadequate to cover a provision made for the diminution in the value of an asset, Parliament in its wisdom thought that its intention to impose a Minimum Alternate Tax (MAT) on companies which earned profits and declared dividends but did not pay any tax (after availing of all the allowances and reliefs permitted under the Income Tax Act) would be better effectuated by introducing a provision to the effect that even a provision made for diminution in the value of any asset would be added to the book profit. The statutory basis of the judgment of the Supreme Court in HCL Comnet (Supra) was changed; whereas the Supreme Court pointed out the inadequacy of the existing clause (c) to cover a provision for the diminution in the value of any asset, t....
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.... income" as meaning "the total amount of income referred to in section 5, computed in the manner laid down in this Act". We have already seen that under sub-section (1) of section 115JB the book profit of a company shall be deemed to be its total income. Sub-section (1) is as follows: "(1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after [the 1st day of April, 2012] is less than [eighteen and one-half per cent] of its book profit, [such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of eighteen and one-half per cent." 17. Explanation 1 to the Section prescribes the manner in which the book profit of a company shall be computed and it is upon the book profit so computed, after giving effect to the said Explanation, that the tax is payable by the company. In other words it is the book profit adjusted in th....
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....nths before that date". The ratio of this judgment appears to us to apply to the case before us. The tax which was essentially a tax on the book profit and consequently a tax on the total income of the petitioner does not cease to be such a tax or become a new or different tax in nature and character merely because one more item of debit to the profit and loss account is prescribed to be added to the book profit shown in the profit and loss account from a retrospective date. The tax was always on the book profit and on the total income of the company; it continues to remain so even after the retrospective amendment, the change being not in the nature and character of the tax, but on the quantum of the book profit/total income of the company on which it is charged. 19. Three judgments were predominantly relied upon by the counsel for the petitioner in the course of his arguments. The first judgment is that of A.N. Sen, J in Lohia Machines Ltd. & Anr. v. Union of India & Ors.,152 ITR 308. It is in fact the judgment of the minority. However, on the point relied upon by the counsel for the petitioner, the judgment of A.N. Sen, J, cannot be considered as a dissenting or minority judg....
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....new undertakings. When Parliament enacted Section 80J, it was done in the larger public interest. It is, therefore, proper to consider the right granted by the Parliament to an assessee, who had set up a new industrial undertaking in the notified area, as a vested right, and it was so considered by the learned Judge. What Section 80J did, when it was amended by the Finance (No.2) Act, 1980, with retrospective effect from 1.4.1972, was to withdraw the benefit which had already accrued to the assessee as a vested statutory right and it was this kind of retrospective amendment which sought to defeat an accrued statutory right that was perceived to be "likely to affect the sanctity of any statutory provision and may create a state of confusion". It is also well to remember that in that case the legislature had earlier made an attempt to deny the relief granted by the Section, by enacting Rule 19A which was held to be invalid as being a case of excessive delegation. It was this rule that was sought to be validated by making a retrospective amendment to the Section itself and the Section was so amended as to take away the benefit that had earlier accrued to the assessee, in precisely the....
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....to be unreasonable and arbitrary. Such withdrawal makes a mockery of a beneficial statutory provision and leads to chaos and confusion. Such withdrawal in effect results in the imposition of a levy at a future date for past years for which there was no such levy in the relevant years. The imposition of any fresh tax with retrospective effect for years for which there was no such levy is bound to operate unduly harshly on every assessee who is entitled to arrange and normally arranges his financial affairs on the basis of the law as it exists. Such retrospective taxation imposes an unjust and unwarranted accumulated burden on the assessee for no fault on his part and the assessee has to face unnecessarily without any just reason very serious financial and other problems. Imposition of any tax with retrospective effect for years which no such tax was there, cannot also be considered to be just and reasonable from the point of view of the Revenue. The years for which levy is sought to be imposed with retrospective effect had already passed and there cannot be any proper justification for imposition of any fresh tax for those years. Such retrospective taxation is likely to disturb and ....
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....ion, the total income chargeable to tax will be 30 per cent of the book profit as computed. For the purposes of section 115J, book profits will be the net profit as shown in the profit and loss account prepared in accordance with the provisions of Schedule VI to the Companies Act, 1956, after certain adjustments. The net profit as above will be increased by income-tax paid or payable or the provision thereof, amount carried to any reserve, provision made for liabilities other than ascertained liabilities, provision for losses of subsidiary companies, etc., if the amounts are debited to the profit and loss account. Liabilities relating to expenditure which has been incurred or which has accrued in respect of expenses which are otherwise deductible in computing income will not be added back. The amount so arrived at is to be reduced by- (i) amounts withdrawn from reserves if any, such amount is credited to the profit and loss account; (ii) the amount of income to which any of the provisions of Chapter III applies, if any such amount is credited to the profit and loss account; and (iii) the amount of a....
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....re, modified the scheme of MAT. The existing section 115JA has been made inoperative with effect from 1st April, 2001. In its place, the Act inserts a new provision, section 115JB of the Income-tax Act. 43.2 The new provisions provide that all companies having book profits under the Companies Act, prepared in accordance with Part II and Part III of Schedule VI to the Companies Act, shall be liable to pay a minimum alternate tax at a lower rate of 7.5 per cent as against the existing effective rate of 10.5 per cent, of the book profits. These provisions will be applicable to all corporate entities without any exception. 43.3 The new provisions further provide that for purposes of MAT, the company shall follow same accounting policies and standards as are followed for preparing its statutory account. 43.4 The amended provision discontinues the system of allowing credit for MAT in future. However, the taxes paid under the existing provisions of section 115JA shall get the credit. 43.5 The export profits under sections 10A, 10B, 80HHC, 80HHE and 80HHF are kept out of the purv....
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....rect to treat the provisions of Section 80J and the provisions of Section 115JB on par and require the same standards to be fulfilled to enact a valid legislative amendment with retrospective effect in both of them. It is apparent from Section 115JB that the object was to tax the so-called zero-tax companies who did not pay any income tax though they earned huge profits and even distributed dividends. By imposing such a tax on the book profit of such companies, Parliament was widening its revenue collection and it can hardly be suggested that it was granting any benefit to those companies. On the contrary, whatever benefits such companies were earlier enjoying were sought to be withdrawn or severely curtailed by the introduction of Chapter XII B and the Minimum Alternate Tax provisions. It would be erroneous and inaccurate to consider any deduction allowed while computing the book profit of the company as a benefit or relief granted to it in the same manner in which Section 80J conferred a benefit upon an assessee who set up an industrial undertaking in a notified backward area. The scheme and purpose are so different that a comparison of both the provisions would be totally off th....
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.... Explanation 1 to add back the provision for doubtful debts (on the footing that it was a provision for meeting an ascertained liability) was not an incentive or relief consciously allowed to the zero-tax companies in the same manner in which the relief under Section 80J was allowed. The sequitur of this conclusion is that the very weighty observations of A.N. Sen, J, made in the context of Section 80J and the retrospective amendment made by the Finance (No.2) Act, 1980 with effect from 1.4.1972, would be out of place in the context of Chapter XII B of the Income Tax Act. If it is not a benefit, deduction or relief allowed by the legislature, there is no question of applying those observations by saying that the benefit etc. cannot be taken away retrospectively. 25. We will now turn to the second judgment strongly relied upon by the counsel for the petitioner. That is a decision of the Bombay High Court in CIT v. Hico Products (P.) Ltd., [1991] 187 ITR 517. A Division Bench of the High Court conceded that a taxing statute which validates the imposition of a tax earlier held invalid by a court of law or an amendment to remove the lacuna and clarify the legislative intent, even if....
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....hold good and would answer the views expressed by the Bombay High Court. It is emphasised here that there is considerable difference between provisions conceived as incentive or relief provisions, (enacted with a view to foster industrial growth and scientific research activities in the country) and those which essentially seek to bring within the purview of the fiscal legislation companies which did not pay any tax, though earning substantial profits and also dividends. If this essential difference between the two types of provisions is kept in mind, it will be apparent that there can be no question of the retrospective amendment under challenge before us not serving the larger public interest. The provisions of Chapter XII B of the Income Tax Act seek to achieve a larger public interest by removing the inequalities in the tax regime by making companies with the ability to pay tax on account of earning substantial profits, to pay tax and thereby contribute to the fiscal health of the economy. If this is not in the larger public interest, we do not see what can be. 26. We may now turn to the third decision on which heavy reliance was placed on behalf of the petitioner. That is t....
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.... to the Supreme Court. In effect what the High Court held was that an order of a judicial Tribunal such as the Income Tax Appellate Tribunal was not final on a matter of interpretation of the statutory provisions and that its orders could be challenged before the High Court and the Supreme Court, before proceeding to make a retrospective amendment. This was actually articulated by the High Court by saying that "....... such curtailment with retrospective effect cannot be made for overcoming the effect of a judicial decision without taking recourse to the provision of appeal prescribed by law on the plea of delay". 27. We are not sure if this decision can avail of the petitioner before us. Again it needs to be pointed out that Section 80HHC is a Section which grants deduction in respect of profits earned from exports. A particular view canvassed by the assessees on the interpretation of the Section was upheld by the Tribunal. That view was sought to be nullified by an amendment with retrospective effect, on the ground that it was never the intention of the Parliament to allow such a benefit. Some further conditions which were not there at the earlier date were sought to be impose....
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....TC 227 held that this entry did not include furnace oil which was a non-lubricant mineral oil, since the language used in the entry was inappropriate for levying tax on sale of non-lubricant mineral oils. The First Schedule was, therefore, amended by an Amending Act of 1967 to rectify and remove the defect in the language therein as pointed out by the High Court and to validate the past levy and collection of tax in respect of all kinds of non-lubricating mineral oils, including furnace oil at the appropriate rate with retrospective effect from 1.4.1964. Entry 47A was inserted in the Schedule to provide for the rate of sales tax in respect of all kinds of mineral oils (other than those falling under item 47 and not otherwise provide for in this Act) including furnace oil. The retrospective amendment was challenged unsuccessfully before the Madras High Court and on further appeal to the Supreme Court, one of the principal contentions advanced on behalf of the dealer was that the retrospective operation of entry 47A was violative of article 19(1)(g) of the Constitution as it imposed an unreasonable restriction on the right of the appellants to carry on their trade and business. Rejec....
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....nt of objects and reasons to show the intention or to otherwise justify the amendment, it can be said that the legislature always intended to add-back any provision made for diminution in the value of any asset, we have already expressed our view. 31. In Government of AP v. Hindustan Machine Tools Ltd., AIR 1975 SC 2037 the question arose as to the validity of a retrospective amendment in the definition of the word "house" appearing in Section 2(15) of the Andhra Pradesh Gram Panchayat Act, 1964. The definition of the word "house" as it originally stood for the purpose of levy of house tax did not include certain buildings. An amendment was made in the year 1974 to amend the definition so as to include buildings not originally included in the definition. A building which did not have a main entrance on the common way was included in the definition by the amendment. The amending Act was made retrospective to validate - notwithstanding any judgment, decree or order to the contrary - as if the definition as amended was always enforced. It was held that the amendment was not an encroachment on the judicial power by the legislature. The Supreme Court held that the amendment removed t....
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....8 and 31.3.2009 respectively. It is further pointed out that the amendment was introduced after these dates and only affects assessees in whose case some reassessment or appellate proceedings were pending at the time of introduction of the Bill. On this basis, it is argued that the sole reason for the amendment "appears to arm some assessing officers with a tool to support a prima face erroneous action of adding the provision for bad and doubtful debts to the book profit without any statutory support for the same". This aspect of the matter has been dealt with in the judgment of Supreme Court in National Agricultural Co-operative Marketing Federation of India Ltd. (supra). The following passage from the judgment is relevant:- "It is hardly likely on the given facts, that assessments had been concluded on the basis of the decision in Kerala Marketing case MANU/SC/2021/1998: [1998] 231 ITR 814 (SC) and the period for reopening such assessments had become time barred. In any event the 1998 amendment cannot be construed as authorizing the revenue authorities to reopen assessments when the reopening is already barred by limitation. The amendment does not seek....
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....enabling the petitioner to suo motu file a return and pay the tax. It is therefore, contended that the amount deposited on 30.10.2009 cannot be appropriated as tax by the Government and the same ought to be refunded. 36. This contention is not sought to be linked to the challenge to the validity of the retrospective amendment because the claim for refund can be independently raised even if the amendment is held to be valid, on the ground that there is no provision in the Act for a voluntary payment of the tax without filing a return or a revised return or pursuant to an order of assessment of the income accompanied by a notice of demand. However, the prayer cannot be entertained in these proceedings since there is a separate remedy prescribed in Chapter XIX of the Act. Section 237 deals with refunds and states that if any person satisfies the assessing officer that the amount of tax paid by him or on his behalf or treated as paid by him or on his behalf for any assessment year exceeds the amount with which he is properly chargeable under the Act for that year, he shall be entitled to a refund of the excess. Section 239 says that the claim for refund shall be made in the prescrib....