Lallacherra Tea Co. (P.) Ltd. vs Commissioner of Income Tax

This Judgment has been overruled by : Karnataka Small Scale Industries Development Corporation Ltd. Vs. Commissioner of Income Tax, Bangalore, (2003) 179 CTR 1 : (2002) 258 ITR 770 : (2002) 10 JT 41 : (2003) 7 SCC 224

P. G. Agarwal, J.—In this reference u/s 256(2) of the Income Tax Act, 1961, made at the instance of the assessee the following questions have been referred for opinion of this court :

"1. Whether, within the meaning of Section 115J, the Tribunal was justified in not reducing the 30 per cent of taxed income of the year from the income computed as per the provisions of the Income Tax Act for the purpose of setting off the earlier years depreciation and losses ?

Whether, the deeming provision of Sub-section (2) of Section 115J restricts the deduction of the taxed income of the year from the total income computed under the Income Tax Act for the purpose of setting off the losses and depreciation of earlier year(s) ?

(3) Whether the Tribunal was justified in applying the fiction created u/s 115J beyond the legitimate field by not allowing the deduction of the taxed income of Rs. 74,450 of the year out of the income computed under the provisions of the Income Tax Act, 1961, of Rs. 2,55,866 for the purpose of setting off the earlier years losses ?"

The assessee is a private limited company carrying on the business of manufacturing and sale of tea. The reference relates to the Income Tax assessment of the assessee-company for the financial year ending on March 31, 1988. The relevant facts are as follows.

For the assessment year 1988-89, the assessee-company filed its return computing income at Rs. 2,55,866. The company had a brought forward loss of Rs. 4,87,417 of the assessment year 1987-88. After setting off the income against carried forward loss, an amount of Rs. 2,31,551 was shown as business loss to be carried forward. The Assessing Officer found that as the total income computed was less than 30 per cent of the book profit the special provisions relating to companies contained in Section 115J of the Income Tax Act are applicable. After computing the book profit in terms of the Explanation to Section 115J(1) of the Act a sum of Rs. 74,477 (rounded off to Rs. 74,450) was deemed as total income chargeable to tax.

The assessee preferred an appeal contending that a sum of Rs. 74,450 charged to tax u/s 115J of the Act could not be deducted from the brought forward losses. The appeal was allowed granting the relief as claimed. The Revenue thereafter preferred an appeal before the Tribunal and the learned Tribunal held that the deduction of taxed income is not permissible in view of the provisions of Sub-section (2) of Section 115J of the Act.

We have heard Shri R. K. Joshi, advocate, for the assessee, and Shri U. Bhuyan, advocate, for the Revenue.

Section 115J reads as follows :

"115J. Special provisions relating to certain companies.--(1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee being a company other than a company engaged in the business of generation or distribution of electricity, 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, 1988, but before the 1st day of April, 1991 (hereafter in this section referred to as the relevant previous year) is less than thirty per cent, of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit.

(1A) Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956).

Explanation.--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 (1A), as increased by--. . . .

if any amount referred to in Clauses (a) to (f) is debited or, as the case may be, the amount referred to in Clauses (g) and (h) is not credited to the profit and loss account, and as reduced by--. . .

(iv) the amount of the loss or the amount of depreciation which would be required to be set off against the profit of the relevant previous year as if the provisions of Clause (b) of the first proviso to Sub-section (1) of Section 205 of the Companies Act, 1956 (1 of 1956), are applicable.

(2) Nothing contained in Sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of Sub-section (2) of Section 32 or Sub-section (3) of Section 32A or Clause (ii) of Sub-section (1) of Section 72 or Section 73 or Section 74 or Sub-section (3) of Section 74A or Sub-section (3) of Section 80J."

From the above it is clear that in a company where the income of the company is less than 30 per cent of its book profit, then, its total income shall be deemed to be 30 per cent of the book profit which is taxable and the profit and loss account is to be prepared accordingly. Further where the company had incurred any loss in any previous financial year the amount of loss shall be set off against the profit.

In the present case there is no dispute regarding the computation of business income and the book profit at 30 per cent was Rs. 74,450. The assessee has not challenged that they are liable to pay tax on this amount of Rs. 74,450. The controversy is regarding interpretation of the provisions of Sub-section (2) of Section 115J as quoted above. The assessee had a carried forward loss of Rs. 4,87,417 which could have been adjusted against the income, and as per the deeming provisions of Section 115J, the assessee was required to pay tax on the amount of Rs. 74,450. The case of the Revenue is that the entire amount of Rs. 2,55,866 shall stand deducted from the carried forward loss in spite of the assessee paying tax on Rs. 74,450. On the other hand, according to the assessee, this amount of Rs. 74,450 on which he is liable to pay tax cannot be deducted from the carried forward loss and an amount of Rs. 2,55,866 less Rs. 74,450 that is, Rs. 1,81,416 only shall be set off and the balance shall be allowed to be carried forward.

Learned counsel for the assessee has submitted that an amount which is charged to tax cannot simultaneously be taken as adjusted against losses. In other words, it will amount to contradiction, if tax is demanded against an amount which is adjusted or set off against carried forward losses. The further submission is that where two reasonable views are possible or emerge, the view which favours the assessee should be accepted.

The above propositions were also made before the Tribunal. However, the Tribunal considering the provisions of Sub-section (2) of Section 115J rejected the same holding that there is no equity about the tax and although the provisions of Sub-section (2) of Section 115J may appear inequitable and unjust, the Tribunal should not interfere or interpret the same otherwise, as legislation is the exclusive domain of the Legislature.

The provisions u/s 115J of the Act were brought in the statute book to tax what is commonly known as "zero tax companies". It was found that there are companies having large profit but they could legally exempt themselves from paying any tax by taking recourse to various deductions and set off. It was therefore provided that 30 per cent of the book profit shall be treated as deemed total income for the purpose of taxes. The provisions of Sub-section (1) of Section 115J are not in challenge before us. Now coming to Sub-section (2) of Section 115J let us see if it provides that 30 per cent, of the deemed income which is chargeable to tax shall also be liable for adjustment against carried forward losses. Apparently there is no such positive enactment. The Sub-section merely provides that provisions of Sub-section (1) shall not affect the determination of the amount relating to relevant previous year to be carried forward to the subsequent year or years under the various provisions mentioned in the section.

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 in 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.

In our view, Sub-section (2) does not provide for any such interpretation and as such the reference is answered in favour of the assessee and against the Revenue. The amount of Rs. 74,450 which has been charged to tax cannot be adjusted against carried forward losses.