TaxTMI 
TaxTMI 
2019 (7) TMI 35
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....and are liable to be struck down and set aside? (ii). Whether the aforesaid provision in context of an assessee not employing depreciable assets due to nature of business itself, use of labour intensive techniques or otherwise is arbitrary, discriminatory and unconstitutional inasmuch as the same creates an artificial distinction and denies legitimate deduction of actual business losses without intelligible differentia and is thus violative of Articles 14 and 19(1)(g) of the Constitution of India, and thus unconstitutional and void? (iii). Whether the aforesaid provision by taxing artificial profits runs contrary to the object of introduction of Section 115JB of the Act itself, the core object of the Income Tax Act, 1961 and the mandate of Article 265 of the Constitution of India and thus the provisions are ultra vires and invalid qua the Constitution of India? (iv). Whether the aforesaid provisions runs contrary to the normal provisions of the Act (i.e. other Minimum Alternative Tax provision under Section 115JB of the Act) which do not provide any such distinction (of 'whichever is less') between brought forward business loss and unabsorbed depreciation? (v). ....
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....ckground of the aforesaid facts that the petitioner has challenged the constitutional validity of the provisions of clause (iii) of the Explanation to section 115 JB of the Act. Before adverting to the facts of the case as well as to the contentions advanced on behalf of the respective parties, it may be pertinent to take note of the legislative history as well as the relevant statutory provisions. [7.2] A new Chapter XII-B, containing section 115J, came to be inserted by the Finance Act, 1987, with effect from 1st April, 1988. The new section made provision for levy of minimum tax on book profits of certain companies. Referring to the proposed section 115J, the Minister for Finance in the Budget Speech (Finance Bill, 1987), explained the rationale behind its introduction in the following words: "80. 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 This does not seem to have helped and is being withdrawn.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....
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....ection 115J) apply. It has also been provided that the aforesaid provisions shall not affect determination of the amount to be carried forward to the subsequent years under the provisions of section 32(2), 32A(3), 72, 73, 74, 74A and 80J relating to unabsorbed depreciation, unabsorbed investment allowance, unabsorbed loss and unabsorbed deduction relating to tax holiday. As a consequential amendment, Chapter VIB of the Income Tax Act relating to restriction on certain deductions in the case of companies, is proposed to be omitted. These amendments will take effect from 1st April 1988 and will, accordingly, apply in relation to the assessment year 1988-89 and subsequent years." [7.4] The scope and effect of the provisions of section 115J had been elaborated in the departmental circular No.495 dated 22nd September, 1987. The portion of the said circular insofar as the same is relevant for the present purpose reads as under: "[36.3] Section 115J, therefore, involves two processes. Firstly, an assessing authority has to determine the income of the company under the provisions of the Income Tax Act. Secondly, the book profit is to be worked out in accordance with the Explana....
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....before the company at its annual general meeting in accordance with the provisions of Section 210 of the Companies Act, 1956: Provided further that where the company has adopted or adopts the financial year under the Companies Act, 1956, which is different from the previous year under this Act,- (I)the accounting policies; (ii)the accounting standards adopted for preparing such accounts including profit and loss account; (iii)the method and rates adopted for calculating the depreciation, shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including profit and loss account for such financial year or part of such financial year falling within the relevant previous year. Explanation-1.-For the purposes of this section, 'book profit' means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by- (a) xxxx to (h)xxxx if any amount referred to in clauses (a) to (h) is debited to the profit and loss account, and as reduced by xxxx (iii) the amount of loss brought forw....
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....nate Tax (MAT) on companies. Under the provisions of this section, as applicable to the assessment year under consideration a company is required to pay at least 10% of its book profit as tax. In case the tax liability of a company under the regular provisions is more than this amount, the provisions of MAT will not apply and the company shall pay regular tax as per the regular scheme. Under the provisions of section 115JB of the Act, a deeming fiction has been introduced whereby in case where the tax payable by a company is less than 10% of its book profit, such book profit is deemed to be the total income of the assessee and the tax payable by the assessee on such income is the amount of income tax at the rate of 10%. Sub-section (2) of section 115JB of the Act provides for the manner in which the profit and loss account has to be prepared. The Explanation to section 115JB defines "book profit" to mean the net profit as shown in the profit and loss account for the relevant previous year prepared under subsection (2), as increased by clauses (a) to (g) thereunder. If any amount referred to in clauses (a) to (f) is debited to the profit and loss account, and as reduced by clauses (....
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....arried forward loss as well as unabsorbed depreciation in their books of account or only either of the two, has no nexus to the object sought to be achieved, viz., to tax prosperous companies. [7.9] In this regard it may be germane to refer to the decision of a Constitution Bench of the Supreme Court in S.K. Dutta, ITO v. Lawarence Singh Ingty, (1968) 68 ITR 271, wherein it was held thus: "It is not in dispute that taxation laws must also pass the test of Article 14. That has been laid down by this Court in Moopil Nair v. State of Kerala, [1961] 3 S.C.R. 77. But as observed by this Court in East India Tobacco Co. v. State of Andhra Pradesh, [1963] 1 S.C.R. 404, 409, in deciding whether the taxation law is discrimi- natory or not, it is necessary to bear in mind that the State has a wide discretion in selecting persons or objects it will tax, and that a statute is not open to attack on the ground that it taxes some person or objects and not others; it is only when within the range of its selection, the law operates unequally, and that cannot be justified on the basis of any valid classification, that it would be violative of Article 14. It is well settled that a State does not....
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....asures greater latitude is given to such statutes than to other statutes. All decisions in the economic and social spheres are essentially ad-hoc and experimental. Since economic matters are extremely complicated, this inevitably entails special treatment for special situations. The State must, therefore, be left with wide latitude in devising ways and means of fiscal or regulatory measures, and the court should not, unless compelled by the statute or by the Constitution, encroach into this field, or invalidate such law. As regards economic and other regulatory legislation, judicial restraint must be observed by the court and greater latitude must be given to the legislature while adjudging the constitutionality of the statute because the court does not consist of economic or administrative experts. [7.12] The Court in the said decision was dealing with the provisions of the Stamp Act, 1899 (as in A.P.), and held that it is well settled that stamp duty is a tax, and hardship is not relevant in construing taxing statutes which are to be construed strictly. That there is no equity in a tax. If the words used in a taxing statute are clear, one cannot try to find out the intention a....
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....evance ventilated is that the petitioner is put to undue hardship inasmuch as clause (iii) of the explanation to section 115JB of the Act does not permit reduction of book profit to the extent of brought forward loss, in case where a company does not have any unabsorbed depreciation as per its books of account. The constitutional validity of the said provision is also challenged on the ground of absurdity on the ground that though the petitioner does not have any income in the year under consideration, merely because the petitioner has shown book profit under the Companies Act, 1956, the petitioner becomes liable to pay tax under the provisions of section 115JB of the Act, without being in a position to set off the brought forward losses of the earlier years, which is absurd as the petitioner does not have any income in the year under consideration. [7.16] The Income Tax Act, 1961 is indubitably a fiscal statute. The legislature has over the years been devising ways and means to prevent companies from avoiding total payment of income-tax by resorting to the various deductions and allowances made under the Act. In its attempt to bring all companies under the tax net, the legislat....
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....he petitioner itself had debited the expenditure incurred by it to the profit and loss account and thereafter, had assigned its participating interest in the UJV to M/s Cairn India Ltd. Before it actually started making any profit in relation to the business and as such, was not in a position to set off its losses against the income earned by it. In the year under consideration, it is an admitted position, that the petitioner had a book profit of Rs. 11,64,67,873/- as per its books of account as maintained in accordance with provisions of the Companies Act, 1956 and as such, became liable to pay income tax in respect thereof under section 115JB of the Act. It is also not as if the petitioner was not permitted to set off its brought forward losses against its income. In fact it is only after computing the income under the provisions of the Income Tax Act after allowing all allowable deductions, because the income tax payable works out to less than ten per cent of book profits that the petitioner has become liable to be assessed under provisions of section 115JB of the Act on its book profits. Thus, merely because, in the peculiar facts and circumstances of the case of the petitioner....