SECITION 115JB- CASE OF DCW LTD -SOME RELEVANT IMPORTANT LEGAL PROVISIONS AND CONTENTIONS WHICH NEED TO BE RAISED TO TURN LOST CASE INTO A THUMPING WINNING of DCW before High Court.

[CA DEV KUMAR KOTHARI]

Relevant links and references:

Sections 2 (45), 4, 5, 14, 80B, 115JB ,115O, of Income-tax Act, 1961.

DCW Limited. Versus Deputy Commissioner Of Income-Tax. 2009 (1) TMI 298 (Tri)

(1996) 132 CTR (Articles) 230- 235 by Dev Kumar Kothari

Analysis of some relevant provisions:

Some relevant provisions about Gross Total Income (GTI), Total Income (TI) and Tax Payable:

The term ‘total income’ is given definite meaning in section 2 (45) as follows:

total income’ means the total amount of income referred to in section 5, computed in the manner laid down in this Act’

Charge of income-tax.

4. (1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year ²[* * *] of every person :

Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly.

(2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act.

Scope of total income.

5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which

          (a)  is received or is deemed to be received in India in such year by or on behalf of such person ; or

          (b)  accrues or arises or is deemed to accrue or arise to him in India during such year ; or

          (c)  accrues or arises to him outside India during such year :

Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.

(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which

          (a)  is received or is deemed to be received in India in such year by or on behalf of such person ; or

          (b)  accrues or arises or is deemed to accrue or arise to him in India during such year.

Explanation 1. Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.

Explanation 2.For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.

Heads of income.

14.   Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income :—

          A.—Salaries.

          ¹[***]

          C.—Income from house property.

         D.—Profits and gains of business or profession.

         E.—Capital gains.

         F.—Income from other sources.

[CHAPTER VI-A

DEDUCTIONS TO BE MADE IN COMPUTING TOTAL INCOME

A.—General

Deductions to be made in computing total income.

80A. (1) In computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of this Chapter, the deductions specified in sections 80C to ²[80U].

(2) The aggregate amount of the deductions under this Chapter shall not, in any case, exceed the gross total income of the assessee.

xxx

[Definitions.

80B. In this Chapter—

(5) "gross total income" means the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter.

Deductions from GTI is must to determine Total Income or chargeable income:

On reading of the above provisions, it is abundantly clear that for computation of ‘total income’. (TI) there must be Gross Total Income (GTI) from which deductions under Chapter VIA are to be allowed. The GTI minus such deduction will be the amount of TI. In case there is no GTI, deductions under chapter VIA cannot be allowed and ‘total icnome’ cannot be computed.

From an earlier article published in (1996) 132 CTR (Articles) 230- 235 :

In the article titled “ IS THERE ANY ZERO TAX COMPANY OR PERSON IN REAL SENSE”, author had discussed various issues about taxation, exemption, incentives and disincentives through fiscal legislations including the Income-tax Act 1961. These provisions are aimed to achieve certain objectives to encourage something and also to discourage something.

The incentives given are aimed for some of purposes. In case due to such incentives the taxpayer has no taxable income, in spite of having book profit, there should not be withdrawal of incentive by imposing tax in some other manner. Imposition of tax in other manner like tax on book profit, the impact of incentive is negated. Therefore, on one hand allowing incentives and on other hand imposing tax on book profit both are contrary and make things complex. Such situation must be avoided. The author had written that

“So long a person contributes towards achievement of various purposes of the Income-tax Act, there should not be stigma against him on account of lower income-tax paid by him.”

In conclusion, the author had stated that therefore, the lesson is that contribution of someone to the society should be considered by taking into account his contribution in all respects and not by taking narrower view about some aspects. There should not be hue and cry regarding someone not having paid income-tax; everyone is free to avail the benefits and concessions conferred by the law.

In the article published during 1996 the author had written as follows about S. 115J:

Section 115J was a special provision incorporated under Chapter XII-B under the chapters and sections heading “Special provisions relating to certain companies”. This section was inserted by the Finance Act, 1987 with effect from lst April, 1988, and it was operative upto assessment year 1990-91. Thus it was operative only for three assessment years. This section, during its short life of three years has seen many amendments almost in every year. The amendments have been effected inter alia vide Direct Tax Laws (Amendment) Act, 1989, with effect from lst April, 1989; Direct tax Laws (Second Amendment) Act, 1989 with effect from lst April 1990; Finance Act, 1989 with effect from lst April, 1989 Finance Act, 1990 with effect from lst April, 1990. Once an amendment with retrospective effect from lst April, 1988, was also made vide the Finance Act, 1989. It has been clarified by a number of amendments, but still this short lived provision is very much full of ambiguities and uncertainties. This is in fact indicative of lack of clear vision and foresightedness in drafting of provisions which are unnatural and imposed one which does not meet cannons of taxation, in the overall context of Income-tax Act.

In this write up a crucial question is being examined about applicability of section 115J, in a case when there is no total income as per computation under provisions of the Act i.e. cases when computation of total income results into loss or nil income. Computation of total income requires the following steps:

I. Computation of current income under different heads

II. Clubbing, set off etc. of current income under different heads

III. Set off of past losses, if any, under different heads

IV. Computation of gross total income

V. Allowing deductions under Chapter VI-A

VI. Determination of chargeable profits or gains i.e. total income before depreciation

VII. Allowing depreciation under section 32 against chargeable profits or gains to the extent of chargeable profits or gains and ascertaining balance amount of depreciation which will form part of current depreciation of subsequent year(s).

IX. checking whether ‘total income’ is less than 30 per cent of the book profit.

X. If total income is less than 30 per cent of book profit, 30 per cent profit will be total income under section 115J.

If there is no gross total income, there does not arise occasion for allowing deductions under Chapter VIA, to compute total income (before depreciation), and to allow depreciation to the extent of chargeable profits or gains. Therefore, in such cases computation of total income, and the provision of section 115J cannot be applied.

(1) If there is no income at all as computed under the provisions of the Income-tax Act, section 115J is not at all applicable because the words and phrases like ‘the total income, as computed under this Act…’ can include only positive total income, if any, after allowing deductions under Chapter VIA of the Act. If there is no total income at all, or there is a loss computed under Income-tax Act, or the gross total income is not sufficient enough to allow deductions prescribed under the Chapter VIA, and depreciation allowable then the provisions of section 115J cannot, at all be applied. Because:

When there is loss as per computation of total income under Income-tax Act, the provisions of section 115J cannot be applied. Section 115J is a special charging provision and it has to be interpreted strictly. The term ‘income’, cannot by any stretch of imagination include ‘loss’ for the purpose of charging tax.

Applying the principles of strict interpretation section 115J is to be strictly interpreted. On strict interpretation, we find that in absence of total income or gross total income permitting some allowance of deductions under Chapter VIA, section 115J cannot be applied and it cannot be given effect to the charge of tax under section 115J.

Similarly, if after allowing some deductions fully or partly under Chapter VIA, if the total income is nil, section 115J cannot be applied.

For example:

                                                                                                                       Rs.

1. Income for the year                                                                                  50,000

Past losses Rs.1,00,000 set off to the extent of                                           50,000

Gross total Income                                                                                          Nil

Deduction available under Chapter VIA Rs.20,000 but cannot be allowed in view of lack of gross total income.

In the above case even past losses are not fully set off, there is no gross total income and there is no total income therefore section 115J cannot be applied because there is no ‘total income’. Applicability of section 115J can only be considered after the earlier steps towards computation of total income have taken place fully and not otherwise. When benefits available under the Act are not exhausted, due to lack or inadequacy of ‘gross total income’ a tax cannot be imposed.

                                                                                                                        Rs.

2. Gross total income for the year                                                              50,000

Deductions available under Chapter VIA Rs.1,00,000

But allowed only to the extent of gross total income                                50,000

Total income                                                                                                   Nil

In this case also gross total income is not sufficient to fully avail deductions under Chapter VIA, and there is no ‘total income’, therefore, section 115J cannot be applied, in absence of ‘income’.

The expression ‘total income’, in the context of a charging provision like section 115J does not and cannot include ‘loss’. ‘Income’ means a positive income. If negative income is also considered as ‘income’, for imposing a tax, then one is afraid, that even, in cases of loss tax will have to be paid. Person who has earned a profit of say Rs. one lakh, and another who suffered loss of Rs. one lakh, both will have to pay tax equally. That cannot be case in charging section.

The term ‘income’ includes loss only for the purposes of determination of gross total income or total income of an assessee for the purpose of computation of income and not for the purpose of levying tax. For example, for clubbing of income under section 64 it is clearly provided that ‘income’ includes ‘loss’, this is to determine total income after set-off of loss. This is not to impose tax on loss. Before this specific provision the Supreme Court has held that minor’s/wife/s loss will be set off against partner’s/husband’s income, if the case is one in which income of minor or wife would have been added.

However no one can say that a tax can be imposed on loss because the term ‘income’ includes ‘loss’.

Section 115J is also a charging section, and, therefore, it has to be interpreted strictly. If the income computed as per other provisions of the Act is a loss or nil income there cannot be a charge of tax under section 115J. However in such case also it cannot be said that the company is a zero tax company. While availing other incentives, the company spend money on various accounts and in such expenses indirect taxes by way of excise duty, sales tax, and other taxes are also paid.”                                 *******

In another articles also author had expressed that the above contentions are also applicable in relation to similar provisions for levy of minimum alternate tax.

Section 115JB:

The contentions as mentioned in respect to S. 115J are also applicable in casse of S. 115JA and 115JB. In case of S. 115JB, additional or further steps (in addition to those in case of S. 115J) are as follows:

1. Determination of total income
2. Determination of tax on total income,
3. Determination of tax on book profit at applicable rates.
4. To find out excess of tax on Book profit over normal tax, to work out amount of eligible MAT credit.
5. Tax payable on book profit, in case it is more than tax payable as normal tax.

Therefore, in case of S.115JB requirements are more strict than in comparison to S.115J and 115JA. If the procedure for computation as per above steps cannot be made, then charge to tax shall also fail.

On the basis of above contentions, in many cases it has been concurrently held by CIT(A)/ Tribunal and High Court that when there is no Gross Total Income, Deductions under Chapter VIA could not be allowed, total income could not be computed, tax payable is not determined etc. then S. 115J, 115JA and 115JB will not apply. Many of such decisions have attained finality as appeal before Tribunal , High Court and the Supreme Court, as the case may be have not been preferred.

The limited issue raised by DCW Ltd:

In the case of DCW limited, unfortunately the assessee raised a very limited though very important issue which can be summarized in words that “in case no tax is payable on normally computed income, section 115JB will not apply on strict interpretation of charging section”.

During hearing also other vital contentions about computation provisions, integrality of computation and charging section etc. were not raised by counsels of assessee. The issue was raised , for the first time , by way of an additional ground before the Tribunal. After hearing detailed arguments and considering various case laws about admissibility of additional grounds in given facts and circumstances, the Tribunal admitted the additional ground, though raised for the first time before Tribunal.

The case of DCW is definitely very well argued, but only on limited issue as pointed out above that is playability of tax on normal income. The learned Counsels also took benefit of judgments in relation to S. 271(1) (c) prior to amendment to point out that playability of tax on normally computed income is a prerequisite to impose tax u/s 115JB. However, other contentions, as expressed by the author were not at all argued.

The learned Departmental Representative (D/R forcefully argued that as per contention of the A/R of assessee, S. 115JB will apply if At least one rupee is payable as normal tax and not when even one rupee is not payable, he opposed this contention strongly.

In absence of contentions raised by counsels in grounds of appeal and also during hearing, the honorable Tribunal has not considered contentions as raised by author. Had these contentions been raised, hopefully the Tribunal could have decided issue in favor of assessee. This shows need to raise all possible contentions and arguments and not to rely on limited issues or concluding issues and leaving aside prior steps or preliminary steps for the contention raised. In case of DCW contention raised is that there should be tax payable, however, preliminary steps required to ascertain tax payable were not argued.

Scope of this write-up:

Scope of this write-up is limited to the issue relating to Minimum Alternate Tax, popularly known as MAT which is levied vide provisions of S. 115JB. Earlier there were provisions of MAT vide section 115J, 115JA which were also similar so far main charging provisions, and conditions of charge are considered. The differences are found in relation to determination of book profit and tax payable on book profit. There is no change about determination of income under different heads, gross total income, total income and tax payable on total income as per normal computation made under the provisions of the Act as required under section 4 and 5.

Reported case of DCW about MAT analyzed:

The relevant ground and submissions of assessee and revenue are reproduced below with highlights marked by red color, for easy analysis and to point out important aspects. The author had also made some observations where found necessary:

From order of Tribunal: Additional ground:

"1. On the facts and circumstances of the case and in law, the assessee submits that since there is no income-tax payable on the total income as computed under the Act on regular basis, the provisions of S. 115JB of the IT Act, 1961 are not attracted and the learned AO erred in computing the income and levying tax thereon under S. 115JB of the Act.

Observations of the author:

The ground is strictly on aspect that S. 115JB is not applicable since there is no income-tax payable. Other forceful contentions, as suggested by author have not been raised. However, such contentions can be raised before the High Court, because those contentions are only related with determination of tax payable – for ascertain tax payable all those steps are statutory requirement under law.

From order of Tribunal

10. First, we will deal with the additional ground raised by the assessee as the same goes to the very root of assessee's tax liability. Sec. 115JB(1) reads as under:

"(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, 2001, is less than seven and one-half per cent of its book profits, 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 seven and one-half per cent."

11. Learned counsel submitted that s. 115JB is a charging section and, therefore, if the charge created under the Act is not specifically attracted then no tax can be realized from the subject. Learned counsel referred to p. 7 of the paper book, wherein, extract of following cases have been reproduced:

(i) CWT vs. Ellis Bridge Gymkhana [1997 (10) TMI 2 - SUPREME Court] = (1997) 143 CTR (SC) 138 : (1998) 229 ITR 1 (SC)

(ii) Vikrant Tyres Ltd. vs. ITO [ 2001 (2) TMI 129 - SUPREME Court] = (2001) 166 CTR (SC) 1 : (2001) 247 ITR 821 (SC) 

Drawing support from these decisions, learned counsel submitted that in assessee's case, no income-tax is payable under normal provisions, therefore, charge under s. 115JB cannot be attracted. He referred to the decision of the Hon'ble Bombay High Court in the case of Elphinstone Spinning & Weaving Mills Co. Ltd. vs. CIT [1955 (9) TMI 52 - BOMBAY HIGH COURT] =(1955) 28 ITR 811 (Bom), wherein, it was held that tax cannot be imposed by implication and plain language must prevail over object of legislature. Learned counsel referred the following passage from this judgment:

"In the first instance, the plain language of the proviso indicates that the tax is to be charged on the total income and on nothing else but quite apart from it, as I have pointed out earlier, the entire scheme of the IT Act is that income-tax or super-tax is payable on the total income of the previous year and in prescribing a rate or rates applicable to the total income, which is all that s. 2 of the Indian Finance Act, 1951, purports to do in terms of the First Schedule to that Act, it cannot conceivably be held that the legislature intended to subject to tax anything other than the total income which alone attracts tax under the scheme of the Indian IT Act. Obviously, although as I have pointed out earlier total income in a given case might be calculated as negative, total income for the purpose of attracting tax must of necessity be a positive figure, and, therefore, this proviso cannot apply to a company which does not have a total income which attract tax."

He submitted that in this case, the meaning of term 'profits liable to tax' under the IT Act in the year ending of 31st March, 1952 was interpreted and it was held that it is difficult to understand how there can be an additional income-tax when to start with there is no income-tax at all. It was held that an additional income must postulate first a total income liable to tax. Similarly, he submitted that firstly, there has to be income-tax payable under the normal provisions of the IT Act and then only we have to see as to whether the same is less than seven and a half per cent of the book profits or not. Learned counsel further referred to s. 271(1)(iii) and pointed out that legislature has substituted 'in addition to any tax payable' by 'in addition to tax, if any, payable'.

In this regard he referred to Circular No. 8 of 2002, dt. 27th Aug., 2002 [(2002) 178 CTR (St) 9], wherein amendment in s. 271 relating to penalty was explained as under:

"77.5 The existing provisions of cls. (ii) and (iii) of sub-s. (i) of the said section provide for levy of the penalty specified therein, in addition to any tax payable. Certain Courts have held that unless some tax is payable, no penalty can be levied.

77.6 The Finance Act, 2002, has amended the said clauses to clarify that the penalty specified in them can be levied even if no tax is payable on the total income assessed."

With reference to this amendment learned counsel submitted that the term "payable" in s. 115JB not being qualified by term "if any" has to be interpreted to mean positive tax.

12. Learned Departmental Representative submitted that s. 115JB is a deeming provision, charge is on income, which has to be computed as per the provisions of s. 115JB. He submitted that the intention of legislature in bringing s. 115JB was to tax such prosperous companies, who were not paying any tax. He submitted that provision has to be equitably applied. In this regard, he submitted that if the assessee's contention is accepted then it will lead to abnormal position whereby a company liable for paying Re. 1 as income-lax under normal provisions would be covered by provisions of s. 115JB but those not liable to any tax i.e., zero-tax companies would escape liability. Learned Departmental Representative submitted that tax payable is consequential in nature. He submitted that if any ambiguity is caused by the term 'income-tax payable' then harmonious construction is to be done having regard to the term "less than seven and a half per cent of book profit". He referred to the decision of the Hon'ble Supreme Court in the case of Kerala State Industrial Development Corporation Ltd. vs. CIT [2002 (11) TMI 8 - SUPREME Court] = (2003) 180 CTR (SC) 192 : (2003) 259 ITR 51 (SC) to submit that the Finance Minister's Speech can be referred to in order to find the true intention of the legislature. Learned Departmental Representative submitted that while introducing s. 115JB, it was observed as under:

"43.1 In recent years, as the number of zero-tax companies and companies paying marginal tax had grown, MAT was levied under s. 115JA of the IT Act from the asst. yr. 1997-98. The efficacy of the existing provision, however, declined in view of the exclusions of various sectors from the operation of MAT and the credit system. The Act has, therefore, modified the scheme of MAT. The existing s. 115JA has been made inoperative w.e.f. 1st April, 2001. In its place, the Act inserts a new provision, s. 115JB of the IT 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 Sch. 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."

With reference to these extracts, learned Departmental Representative submitted that all zero-tax companies are covered by the provisions of s. 115JB.

13. Learned counsel in his rejoinder referred to the decision of the Hon'ble Supreme Court in the case of CIT vs. Elphinstone Spinning & Weaving Mills Co. Ltd. [1960 (5) TMI 2 - SUPREME Court] = (1960) 40 ITR 142 (SC) and submitted that the specific objection of learned Departmental Representative stands answered by Hon'ble Supreme Court in the following words:

"Where there is a total income and there is a payment of dividend either more or less than the limit fixed, one can easily find the figures by which the total income as reduced exceeds or falls short of the dividends and the additional tax that has to be paid. But, when the total income is a negative figure and no tax on the total income is levied, the words of the second part of the para 'total income' 'profits liable to tax', 'dividends payable out of such profits' and 'an additional income-tax' cease to have the meaning they were intended to convey.  There is no doubt that if the words of a taxing statute fail, then so must the tax.....

The word 'additional' in the expression 'additional income-tax' must refer to a state of affairs in which there has been a tax before. The words 'charge on the total income' are not appropriate to describe a case in which there is no income or there is loss."

As regards the arguments of learned Departmental Representative that object of s. 115JB is to be considered, learned counsel referred to the decision of the Hon'ble Delhi High Court in the case of Escorts Ltd. vs. Union of India & Ors.[1991 (1) TMI 105 - DELHI High Court] = (1991) 93 CTR (Del) 169 : (1991) 189 ITR 81 (Del)   to submit that the Finance Minister Speech, Notes on Clauses and Aims and Objects, etc., of a particular legislature cannot be referred to when the language is unambiguous. The Hon'ble Court has held as under:

"In our opinion, merely because a provision of the Act is harsh and we dare say that all provisions which levy tax are harsh, this is no ground for discarding one of the cardinal principles of interpretation of statutes which is that if the language is clear and unambiguous, then resort cannot be had to the aims and objects or to the Minister's Speech with a view to interpret the provisions of an Act. It is only if there is any ambiguity in the language then in order to understand the intention of the legislature, aid can be taken of the proceedings in Parliament including the aims and objects of the Act. Where, however, as in the present case, the language is plain, clear and unambiguous, the question of referring to the Finance Minister's Speech in an effort to find out what is the intention of the legislature does not arise."

Learned counsel referred to the decision of the Hon'ble Supreme Court in the case of Padmasundara Rao (Decd.) & Ors. vs. State of Tamil Nadu & Ors. [2002 (3) TMI 44 - SUPREME Court] = (2002) 176 CTR (SC) 104 : (2002) 255 ITR 147 (SC) to submit that it is well-settled principle in law that the Court cannot read anything into a statutory provision which is plain and unambiguous. A statute is an edict of the legislature. The language employed in a statute is the determinative factor of legislative intent. The first and primary rule of construction is that the intention of the legislation must be found in the words used by the legislature itself. The question is not what may be supposed and has been intended but what has been said.

14. Learned counsel further referred to Budget Speech of Finance Minister contained in (2000) 159 CTR (St) 1 : (2000) 242 ITR (St) 106, wherein, it was observed as under:

"The various exemptions currently available while calculating Minimum Alternate Tax (MAT) and the credit system has undermined the efficacy of the existing provision and has also led to legal complications. To address these issues, I propose that the MAT be now levied at the revised rate of 7.5 per cent of the 'book profits' as determined under the Companies Act instead of the existing effective rate of 10.5 per cent. However, this will now be uniformly applied barring one exception that I will mention later. There will also be no credit for MAT paid. This should bring all zero-tax companies within the tax net which is also the basic purpose of this tax. The new system has the virtue of a lowered rate of tax, a simple method of computation, and an equitable spread."

"Clause 49 seeks to insert a new s. 115JB relating to special provisions for payment of tax by certain companies.  It is proposed to provide that in case of a company, if the income-tax payable on the total income as computed under the IT Act in respect of any previous year relevant to the assessment year commencing on or after 1st April, 2001, is less than seven and one-half per cent of its book profit, the tax payable for the relevant previous year shall be deemed to be seven and one-half per cent of such book profit. The book profit shall mean the net profit as shown in the P&L a/c prepared in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act, 1956, as reduced by certain adjustments, as specified. The profits received in convertible foreign exchange and eligible for deduction under s. 80HHC or s. 80HHE or s. 80HHF or the income referred to in s. 10 or s. 10A or s. 10B shall be excluded while working out 'book profits'. It is also proposed to provide that in respect of the relevant previous year the amounts determined under the provisions of sub-s. (2) of s. 32 or sub-s. (3) of s. 32a or cl. (ii) of sub-s. (1) of s. 72 or s. 73 or s. 74 of sub-s. (3) of s. 74A, shall be allowed to be carried forward to the subsequent year or years.  This amendment will take effect from 1st April, 2001, and will accordingly, apply in relation to the asst. yr. 2001-02 and subsequent years."

16. We have considered the rival submissions and perused the record of the case. There is no quarrel with the proposition that if a charging provision fails then subject cannot be taxed. In this regard, we may reproduce the observations from the two decisions relied upon by learned counsel for the assessee:

(i) CWT vs. Ellis Bridge Gymkhana.  The rule of construction of a charging section is that before taxing any person, it must be shown that he falls within the ambit of the charging section by clear words used in the section. No one can be taxed by implication. A charging section has to be construed strictly, if a person has not been brought within the ambit of the charging section by clear words, he cannot be taxed at all.

(ii) Vikrant Tyres Ltd. vs. ITO.  It is settled principle in law that the Courts while construing Revenue Acts have to give a fair and reasonable construction to the language of a statute without leaning to one side or the other, meaning thereby that no tax or levy can be imposed on a subject by an Act of Parliament without the words of the statute clearly showing an intention to lay the burden on the subject. In this process the Courts must adhere to the words of the statute and the so-called equitable construction of those words of the statute is not permissible. The task of the Court is to construe the provisions of the taxing enactments according to the ordinary and natural meaning of the language used and then to apply the meaning to the facts of the case and in that process if the taxpayer is brought within the net he is caught, otherwise he has to go free. This principle in law is settled by this Court in India Carbon Ltd us. State of Assam [1997 (7) TMI 566 - SUPREME COURT OF INDIA] = (1997) 106 STC 460 : (1997) 6 SCC 479,  wherein this Court, held, "Interest can be levied and charged on delayed payment of tax only if the statute that levies and charges the tax makes a substantive provision in this behalf. A Constitution Bench of this Court speaking through one of us (S.P. Bharucha, J.) in the case of V.V. Sugars vs. Government of A.P. [1999 (4) TMI 519 - SUPREME COURT OF INDIA] = (1999) 114 STC 47 : (1999) 4 SCC 192 reiterated the proposition laid down in the India Carbon Ltd.'s case in the following words [headnote of (1999) 4 SCC]: "The Act in question is a taxing statute and, therefore, must be interpreted as it reads, with no additions and no subtractions, on the ground of legislative intendment or otherwise."

It is equally settled position of law that each general word appearing in a section should be given its full meaning having due regard to the context in which it is used. It should be held to extend to all ancillary or subsidiary matters which can fairly and reasonably be comprehended in it, and in interpreting the same it would not be reasonable to import any limitation on the same. It is also one of the cardinal principles of interpretation that a construction that will render a provision of an enactment wholly or partially meaningless or futile is not to be adopted by the Court. The Courts should endeavour to interpret the provisions of a statute in a manner that will achieve the object of provision, avoid mischief, advance the cause of justice, provide the remedy intended by the statute, make the law workable and enforceable instead of reducing it to a redundant or dead letter and best harmonize with and effectuate the object of legislation.  In the backdrop of this settled position of law, we proceed to examine the provisions of s. 115JB, which admittedly is a charging section. But, at the same time, we have to keep in mind that s. 115JB is a code by itself and, thus, contains substantive as well as procedural provisions. Therefore, which part of the section precisely creates the charge, has to be specifically identified before arriving at any conclusion. If we closely examine s. 115JB, having due regard to the punctuation, we find that there is comma between 'income-tax' and 'payable' and further there is comma before 'is less'. Therefore, full effect will have to be given to the phrase following comma after the phrase 'income-tax'. As per the terms of this section, we find that it will be attracted if income-tax payable in respect of total income computed under the Act is less than seven and one-half per cent of its book profit. Thus, tax payable under the provisions of the Act should be less than seven and one-half per cent of its book profit. Consequently, if the tax payable is more than seven and one-half per cent of its book profit, then this section will not be attracted. Therefore, the dividing line for determining the applicability or non-applicability of the section is seven and one-half per cent of its book profit as compared to tax payable, which actually creates the charge. The charge is not with reference to income-tax payable but with reference to book profits. Charge under s. 115JB is to be determined with reference to 7.5 per cent of book profits. The process of determination of book profit is to be preceded with the comparison of liability for income-tax under normal provisions of income-tax which may be nil also. The income-tax payable cannot be circumscribed by positive figure only.  If we accept the interpretation as suggested by learned counsel for the assessee, then full effect to the term "less" appearing after the comma cannot be given. The word 'less' will loose its relevance. The purpose of comma after the term "income-tax" and before the term 'less' is to qualify term "payable" by the term "less" and, therefore, to say that those companies where income-tax payable being Re. 1 would be covered and not the zero-tax companies, would not be correct. The term 'payable' used in the section cannot be limited only to the positive figure and if the income-tax payable is zero still the requirements of section would be met. The submissions of learned counsel for the assessee that income-tax payable should be given literal meaning cannot be accepted as the same is duly punctuated. In our opinion, the terms of section are unambiguous and literal construction of the phrase dealing with charge ability does not lead to any other interpretation than as discussed earlier.

17. We will now deal with the decision of the Hon'ble Bombay High Court in the case of Elphinstone Spinning & Weaving Mills Co. Ltd. on which learned counsel has placed heavy reliance. In this case the working of the assessee company in the accounting year 1950 resulted in a loss and, therefore, for the asst. yr. 1951-52, the assessee company was not liable to pay tax. In that very year the assessee company declared dividends amounting to Rs. 3,29,062 in respect of the year 1950, and the contentions of the Department was that this sum constituted excess dividend and was liable to pay tax. The Tribunal had referred following two questions for being answered by the Hon'ble Bombay High Court for its esteemed opinion:

(i) Whether the assessee company was liable to pay additional tax.

(ii) If the answer to question (i) is in the affirmative, whether the levy of the additional tax was ultra vires.  The Hon'ble Bombay High Court referred to Finance Act, 1951 on which the Department relied for levying the additional income-tax on excess dividend. The Hon'ble High Court noticed that the Finance Act, 1951 by s. 2 provided that subject to the provisions of sub-ss. (3), (4) and (5) for the year beginning on the 1st day of April, 1951, income-tax was to be charged at the rates specified in Part I of the First Schedule, and sub-s. (7) of this section emphasizes the fact that for the purposes of this section and of the rates of tax imposed thereby, the expression "total income" means total income as determined for the purposes of income-tax or super-tax, as the case may be, in accordance with the provisions of the IT Act. The Hon'ble Court referred to First Schedule to which reference was made by s. 2, and pointed out that same deals with only rate of income-tax, and the relevant provision with regard to companies and excess dividend was to be found in para B and that provided the rate to be charged on the total income of a company and the rate provided was four annas in the rupee and there was a surcharge on one-twentieth of the rates specified in the preceding column. With reference to this provision, the Court observed as under:

"Pausing here for a moment, if as in the case the assessee company had no income at all, no question of assessing the income at any particular rate would arise. It is only when there is an income which constitutes the total income within the meaning of the IT Act that the question has got to be considered as to the rate at which that income is to be assessed to tax. But what is relied upon by the Department is the proviso to this para."

Before considering this provision, the Hon'ble Court examined the scheme underlying the proviso. It observed that the legislature was anxious that the companies should not act in a spendthrift fashion and should plough back some of its profits into the industry, and, therefore, a bait, as it were, was held out to companies not to distribute all the profits they made to their shareholders and the bait took the form of giving the companies a certain rebate. If a company did not distribute as dividends more than nine annas of its profits, then to the extent that dividend paid was less than that figure of nine annas, a rebate of one anna was given to the company concerned. If the company paid more than nine annas, then it was liable to pay an additional income-tax which was provided for in cl. (ii) of the proviso, and the additional income-tax was to be calculated by the difference between the rate of five annas per rupee and the rate which the excess dividend had actually borne. Therefore, a company which did not follow the policy indicated by the legislature not only ran the risk of losing the rebate which was promised to it under cl. (i) of the proviso, but also ran the risk of paying an additional income-tax referred to in cl. (ii) which would be considered as a sort of a penalty imposed on extravagant or spendthrift companies. After considering the scheme of the company, the Hon'ble Court observed that there may not be any difficulty when a company has actually made profits and its profits were assessable to tax and, therefore, the total income on which income-tax could be levied. It observed that the company which had income in a particular year could pay dividend which could exceed the ceiling fixed by the legislature, in which case, no question of rebate would arise with regard to those dividends, and the question of additional tax would arise under cl. (ii). Further, the question before the Court was with reference to such companies which had made no profits at all, which had no income, and which was not assessable to tax under the provisions of the IT Act but had paid dividends out of undistributed profits of preceding year and were available for the purpose of covering the amount of the excess dividend. The Hon'ble Court has observed as under:

"Therefore, what the assessee company was doing in the year of assessment was that it was paying out as dividend profits which in the past year it kept back as reserve or had ploughed back into the industry, and the contention of the Department is that the assessee having paid tax at a certain rate by reason of the fact that they were not distributed as profits, the assessee should now pay the additional tax by reason of the fact that they were now being distributed as dividends."

In the backdrop of these facts, the Hon'ble Court held as under:

"In the first instance, the plain language of the proviso indicates that the tax is to be charged on the total income and on nothing else; but quite apart from it, as I have pointed out earlier, the entire scheme of the IT Act is that income-tax or super-tax is payable on the total income of the previous year and in prescribing a rate or rates applicable to the total income, which is all that s. 2 of the Indian Finance Act, 1951, purports to do in terms of the First Schedule to that Act; it cannot conceivably be held that the legislature intended to subject to tax anything other than the total income which alone attracts tax under the scheme of the Indian IT Act. Obviously, although as I have pointed out earlier total income in a given case might be calculated as negative, total income for the purpose of attracting tax must necessity be a positive figure and, therefore, this proviso cannot apply to a company which does not have a total income which attracts tax."

This decision is clearly distinguishable on facts because firstly, the liability of additional tax as contemplated under the provisions had direct nexus with the excess dividend paid in the relevant year itself but in the facts of the case was paid out of earlier years excess dividend which had been ploughed back as per the requirements of law.  As regards the arguments of learned counsel with reference to amendment to penalty provisions, it would be suffice to observe that under the unamended law, the term "income-tax payable" was not circumscribed or qualified by any phrase and was subsequently qualified by the term "if any".

There is one more reason for not accepting the assessee's contention and that is if the same is accepted then it will become difficult to give effect to the provisions of s. 115JAA(6) which deal with modification of allowable tax credit on reduction or increase of tax payable as a consequence of orders passed under sub-s. (1) or sub-s. (3) of s. 143, s. 144, s. 147, s. 154, s. 155, s. 245D(4), s. 250, s. 254, s. 260, s. 262, s. 263 or s. 264. It will lead to multiplicity of proceedings at various stages. Further, it is the fundamental principle of tax jurisprudence that charge on a person cannot keep on fluctuating with the variation in income depending upon the decisions given by various authorities under the Act.

18. In view of above discussion we dismiss the additional ground raised by the learned counsel for the assessee.

Observations of author:

The order of the Tribunal is based naturally on the ground taken and contentions raised on behalf of assessee and revenue. The mere contention was that when tax payable on normal computation is nil, S. 115JB is not applicable. Therefore, there was no occasion for the Tribunal to consider other contentions as suggested by author.

With respect, the author is of view and feels that the Tribunal has wrongly relied on provisions of S. 115JAA (6) about tax credit.This is because , the case of assessee was of AY 2001-02 for tax liability u/s 115JB.

Vide sub-section (1A) of section 115JAA inserted vide the Finance Act, 1997, w.e.f. 01.04.2006 tax credit in respect of tax paid u/s 115JB(1) is allowed only in relation to tax paid u/s 115JB (1) for AY 2006-07 and subsequent years. Thus tax paid u/s 115JB (1) for the relevant assessment year that is AY 2001-02 no tax credit was allowable.

It appears that honorable Tribunal has made out a difference by referring to punctuations marks -as used in section 115JB (1). However, author feels that Tribunal could not properly appreciated that in case of loss , the loss is kept apart for carry forward and it does not go into computation of gross total income. In case of loss there cannot be a tax payable. Therefore, the Tribunal erred by relying on those provisions of MAT credit. Even when tax credit is allowed, fresh computations have to be made as and when there is re-computation of income and tax under any proceedings under the Act. Therefore, the ground taken by the Tribunal on the basis of section 115JAA (6) is, with due respect appears to be irrelevant and a mistake apparent from records. The assessee DCW can take appropriate steps for rectification and can also take suitable plea before the high Court during appeal.

Playability of tax is essential:

When we go through the provisions of S. 115JA (1) and 115JAA we find that tax payable on normal total income is essential. Unless there is tax payable on normally computed total income, we do not find difference between tax paid u/s 115JA and normal tax. And in such situation provisions of tax credit u/s 115JAA will not be workable.

Even mathematically we need to work out excess of tax on book profit over the normal tax payable on total income. If we reduce nil from tax on book profit, we do not find a different amount. The amount remains the same. For example:

     Book profit 1000

     Loss as per normal computation 5000          

     Tax @ 7.5%     on book profit is                                 75

     Tax on normal income (loss of Rs.5000)                      0

Excess of tax on book profit over normal tax                  75                      

Thus there is no difference in tax payable as MAT and normal tax. Unless there is difference tax credit may not be allowed under section 115JAA (2A). Because tax credit is allowed only when there is a difference between tax paid u/s 115JB(1) and normal tax. In that sub-section also expression used is tax payable.

Therefore, applying contentions as raised by honorable Tribunal about section 115JAA, author find that on reading of S. 115JA and 115JAA there remains no doubt that there must be some tax payable on normal computation to make the provisions of S. 115JA and 115JB workable.

Other important contentions deserves to be raised:

From reading of the above judgment in case of DCW, it is clear that the assessee relied on sole contention that for attracting S. 115JB there must be some tax payable by company and it will not apply in case tax payable on normal computation is nil.

The author feels that the following contentions also need to be raised:

Section 115JB, as reproduced earlier in the judgment of Tribunal, require that there must be a computation of ‘total income’ under normal provisions, and there must be a computation of tax payable on such income. On consideration of provisions, of section 2 (45), 4 , 5, 14, 80, and 115JB as discussed by author earlier in his article published during 1996, we find that towards the determination of ‘total income’ and ‘tax payable’ we require to take several steps of computations. In case of loss, or absence of gross total income the process of computation comes to a grinding halt, the loss is kept apart for c/f, and there are no other computations for arriving at GTI, TI, tax payable, amount of tax credit etc.

In case there is negative income under any head, it is kept apart for set off or carry forward as per relevant provisions.

If there is no positive income under different heads of income, and the sum of such positive income under different heads that is GTI, there does not arise occasion for allowing deductions under Chapter VIA, to compute total income (before depreciation), and to allow depreciation to the extent of chargeable profits or gains on which only tax can be imposed.

Once computation provisions are not capable of implementation to make requisite computations, the charge must fail.

If there is no chargeable income at all as computed under the provisions of the Income-tax Act, section 115J, 115JA and 115JB are not at all applicable because the words and phrases like ‘gross total income’, ‘the total income, as computed under this Act…’ can include only positive income and positive total income, if any, after allowing deductions under Chapter VIA of the Act. If there is no income at all, or there is a loss computed under Income-tax Act, or the gross total income is not sufficient enough to allow deductions prescribed under the Chapter VIA, and depreciation allowable then the provisions of section 115J, 115JA and 115JB cannot, at all be applied.

Another contention which DCW can raise:

DCW can also raise that its case was of a turnaround case, that lead to some book profit for the year, it is not a highly profitable and highly dividend paying company to which section 115JB can be applied if one apply the intention theory as per speech of the Finance Minister then S. 115JB can only be applied to companies which are highly profitable and dividend paying companies and not in cases like that of assessee DCW Ltd.

After imposing tax on dividend, there is no justification to impose tax on book profit:

Once tax is levied on companies who declare dividend on the basis of tax on distributed profits, there is no justification to continue tax on book profit. This is because now companies who are highly profitable and pay higher dividend are also paying tax on dividend distributed. Therefore, the reason for which S. 115J, 115JA and 115JB were introduced are not longer existing.