TMI Blog1992 (3) TMI 133X X X X Extracts X X X X X X X X Extracts X X X X ..... ting year relevant to assessment year under appeal, there was no book profit after adjustment of earlier year's loss against current year's profit. 3. The Income-tax Officer, however, passed an order under section 143(1) and an intimation of adjustment by computing the book profit under section 115J of Rs. 8,51,380, being 30 per cent of current year's profit of Rs. 28,37,947 as per profit and loss account was sent. The ITO was of the view that for arriving at the adjusted book profits, unabsorbed depreciation or business loss, whichever is less, is to be adjusted. Since there was no business loss in earlier years as per the books of account, the amount to be set off was considered as 'nil'. The appellant had, however, contended before the ITO that earlier year's loss of Rs. 31,94,136, which in fact is the unabsorbed depreciation, is to be deducted from current year's profit of Rs. 28,37,947 before arriving at the book profit under section 115J of the Income-tax Act read with section 205(1)(b) of the Companies Act, 1956. The contention of the appellant was not accepted by the ITO. In this regard, the appellant also moved an application under section 154 before the ITO. The ITO, ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to section 115J, which clearly lays down that the amount of loss or the amount of depreciation which would be required to be set off against the profits 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 are applicable. The interpretation of the provisions of section 205(1)(i)(b) of the Companies Act, as given by the CIT (Appeals) and the ITO, is not the correct interpretation. The ITO and the CIT (Appeals) have failed to appreciate the import and the true meaning of clause (b) of the first proviso to section 205(1) of the Companies Act. In this regard, the learned counsel draws our attention to the said provision of the Companies Act which reads as under :---- " If a company has incurred any loss in any financial year or years, which falls or fall after the commencement of the Companies (Amendment) Act, 1960, then the amount of loss or an amount which is equal to the amount provided for depreciation for that year or those years whichever is less. shall be set off against the profits of the company for the year in which dividend is proposed to be declared or paid, against the profits of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t forward loss of Rs. 31,94,136 and current year's profit is only Rs. 28,37,947. The intention of legislation in section 115J is very simple and without any ambiguity. Book profit comes only when the profit can be available for declaration of dividend. Clause (iv) of Explanation to section 115J makes it very clear by adopting section 205(1)(i)(b) of the Companies Act that only if a company has profit available for dividend, then the profit can be taxed as book profit and not otherwise. Clause (b) of the first proviso to section 205(1) of the Companies Act does not require any comparison between loss and amount of depreciation as contesting claims. It only gives an option to the company that the smaller of the two is to be adopted for set off before declaration of dividend where a company has profit for current year and loss for earlier years. 6. The learned counsel also urges that the Revenue has not properly understood the true import and meaning of the word 'loss' under the provisions of the Income-tax Act. Relying on the decision in the case of Garden Silk Wvg. Factory v. CIT [1991] 189 ITR 512, he points out that the Honourable Supreme Court had observed that the loss is only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbiguous or capable of more meanings than one, then the court has to adopt that interpretation which favours the assessee, more particularly so where the provision relates to the imposition of penalty. " This decision, he points out, has also been applied by the Single Member of the Tribunal in the case of Buttwelded Tools (P.) Ltd. 9. The learned counsel has also taken us through a decision of the Commissioner of Income-tax (Appeals) in the case of Vartech Engineers (P.) Ltd., in which the CIT (Appeals) has held that the 'loss' to be considered is the net loss after depreciation. In the said decision of the Income-tax Appellate Tribunal, Delhi Bench, in the case of Steel Authority oflndia Ltd. v. Dy. CIT [1991] 38 ITD 193. In that decision, he urges, the Tribunal has laid down three eventualities while interpreting section 115J of the Income-tax Act, viz., (i) The company may have incurred losses in any previous year or years and in the first year of profit, clause (b) of the first proviso to section 205(1) of the Companies Act permits adjustment of such loss or amount of depreciation, whichever is less, to be set off against the profits of the company for the current year. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss " appearing in clause (b) of the first proviso to section 205(1) of the Companies Act, therefore, means only loss after depreciation and tax. 11. Sri Gupta also draws our attention to an article written by Sri S.Rajaratnam, an Ex-Member of the Income-tax Appellate Tribunal. This article appeared in Taxman Vol. 59 page 448 (sic) copy of which has been filed by the learned counsel before us. In this article, the learned author has adverted to a decision of the Commissioner of Income-tax (Appeals), Madurai, in which it has been held by him that the loss under section 205(1)(i)(b) of the Companies Act is only after depreciation. The predominance of the judicial decisions, therefore, in the opinion of the learned counsel, supports his case. 12. Regarding the interpretation of statutes, dealt with at length by the CIT (Appeals) in his order, the learned counsel submits that the interpretation of " loss " as advanced by the Revenue leads to a situation where a company can pay dividend without providing for depreciation which is against the provisions of the Companies Act. In the opinion of the learned counsel, this is an absurdity. In his view, the provision should be so construed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tribunal. He, therefore, prays that the additional ground should be admitted. 15. On the other hand, the learned Senior Departmental Representative, Sri H. Srinivasulu, very effectively and vehemently opposed the contention of the learned counsel for the appellant. He argues that the order of the CIT (Appeals) is in accordance with law and should, therefore, be upheld. He took us through the relevant portions of the order of the CIT (Appeals) and contended that the CIT (Appeals) had properly appreciated the provisions of section 115J of the Income-tax Act and section 205(1)(i)(b) of the Companies Act. He has also drawn our attention to the intention of the legislature in bringing on the statute book the provisions of section 115J of the Income-tax Act. He points out that in his Budget speech, the Prime Minister, who was holding finance portfolio, explained the intention in bringing on the statute book the provisions of section 115J. The relevant portion of the Prime Minister's speech reads : " It is only fair and proper that the prosperous zero-tax companies should pay at least some tax. The phenomenon of so-called " zero-tax " highly profitable companies deserve attention. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions of Chapter III of the Income-tax Act apply, will be excluded from the computation of book profit, 30 per cent of suchbook-profit shall be treated as total income of the company to which the provisions of section 115J apply. It has also been provided under the Act that the aforesaid provisions shall not affect the determination of the amount to be carried forward to subsequent years under the provisions of sections 32(2), 32A(3), 72, 73, 74,74A and 80J of the Income-tax Act relating to unabsorbed depreciation, unabsorbed investment allowance, unabsorbed loss and unabsorbed deduction relating to tax holiday. This Memorandum explaining the provisions in the Finance Bill, 1987, clearly brings out the purport and the meaning of section 115J of the Income-tax Act. 16. The learned departmental representative continues and points out that in the present appeal, the appellant's case is regarding clause (iv) of Explanation to section 115J. At the time of moving the Finance Bill, clause (iv) of Explanation to section 115J was not there and during the course of general debate amendments were made on 29-4-1987 by the Prime Minister. The relevant portion of the amendment speech is as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ris terms. The intention of legislature in enacting section 115J is to broaden the tax base by tax the prosperous and profit making companies and certainly section 115J has a fiscal mission. The Finance Minister in his budget speech has clearly referred to " past losses or unabsorbed depreciation " as understood in ordinary common parlance. Never was it the intention of the legislature to include the depreciation in the past losses. If it were so, they would not have been referred to independently and distinctly. 19. Adverting to the impugned order of the CIT (Appeals), the learned departmental representative contends that the scheme or section 205 of the Companies Act has elaborately been explained by the CIT (Appeals). Section 205(1) of the Companies Act provides that no dividend shall be declared or paid by a company for any financial year except out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2). Sub-section (2) of section 205 spells out the working of the depreciation as per section 350 of the Companies Act. Clause (a) of first proviso to section 205(1) makes it clear that the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reciation for that year or the earlier years. The comparison is an examination of two or more items to establish similarities and dissimilarities. If the amount of loss as referred to in clause (b) of the proviso were to be regarded as ejusdem generis with the depreciation including arrears of depreciation considered in clause (a) of the proviso then such a comparison is reduced to one within the same clause, indivisible and absolute. If the appellant's contention that depreciation including arrears of depreciation is embedded in the amount of loss were to be followed, then, there was no need for the legislature to introduce the comparison exercise in clause (b) of the proviso, because it would have been sufficient to state in clause (b) of the proviso that an amount of loss representing unabsorbed depreciation would be set off against the profits of the current year. Thus, clause (b) of the proviso is different from clause (a). Clause (a) speaks of provision for depreciation in a year of profit, while clause (b) deals with treatment of depreciation when the company had incurred any loss in any previous financial year or years. In the case of the appellant, there is no loss in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on a particular provision should make a consistent enactment of the whole statute. Where a literal construction of the provision is fraught with the manifestly absurd and anomalous results having the effect of defeating the obvious intention of the legislature, it would be advisable to adopt such a construction as will be in consonance with the principle that all parts of a section should be construed together and every clause thereof should be construed with reference to the context and other clauses thereof, so that the construction put on a particular provision makes a consistent enactment of the whole statute. This dictum would apply all the more, to the interpretation of clause (b) of the first proviso to section 205(1) of the Companies Act. In this regard, the learned departmental representative has placed reliance on the decision of the Supreme Court in the case of CIT v. National Taj Traders [1980] 121 ITR 535. 21.The learned departmental representative has also drawn our attention to the CBDT's Circular No. 495, dated 22-9-1987. He points out that the said Circular has been made public wherein the intention of Parliament has been shown by way of an example. Accordingly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en held : " An appellate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter. There is no good reason to justify curtailment of the powers of the Apellate Assistant Commissioner in entertaining an additional ground raised by the assessee in seeking modification of the orders of assessment passed by the Income-tax Officer. " However, the learned departmental representative points out that the additional ground to be admitted should be pertinent and should be dealt with first by the Assessing Officer. If the Assessing Officer has no opportunity to deal with the issue, the additional ground cannot be raised. He, therefore, prays that the additional ground should not be admitted. 24. In reply the learned counsel for the appellant, Sri K.K. Gupta, points out that the Department is in error in relying on the Prime Minister's speech and the Memorandum explaining the provisions of sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... menon of 'prosperous zero-tax companies' continued. A study was also carried out by an economic journal in regard to the performance of 650 top companies during the year relevant to assessment year 1984-85. The study revealed that out of top 23 profit making companies, the profit and loss accounts of 12 companies showed no income-tax liability though they had profits and had declared dividends. About 139 companies accounted for a net profit of Rs. 274 crores, but still paid no tax. Further, the prospect of section 80VVA becoming otiose became a near certainty with the conscious decision taken to enhance the depreciation rates from assessment year 1988-89 onwards, when block asset concept was to be introduced first. Therefore, there was an imperative need to tackle the problem of prosperous zero-tax companies by suitably modifying section 80VVA. Accordingly, Finance Act, 1987, deleted section 80VVA and introduced new section 115J in its place. Section 115J, therefore, came into force from assessment year 1988-89 onwards. 27. The new provision was made applicable to any company whose total income as computed under other provisions of the Income-tax Act in respect of any accounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attern are important. It is again important to remember that the Parliament does not waste its breath unnecessarily. Just as Parliament is not expected to use unnecessary expressions, the Parliament is also not expected to express itself unnecessarily. Even as Parliament does not use any word without meaning something Parliament does not legislate where no legislation is called for, Parliament cannot be assumed to legislate for the sake of legislation, nor can it be assumed to make pointless legislation. Parliament does not indulge in legislation merely to state what is unnecessary to state or to do what is already validly done. Parliament may not be assumed to legislate unnecessarily. Again while the words of an enactment are important, the context is no less important. For instance, the fact that general words are used in a statute is not in itself a conclusive reason why every case falling literally within them should be governed by that statute, and the context of any Act may well indicate that wide or general words should be given a restrictive meaning. " 30. If the one-sided and restrictive interpretation of the statute given by the appellant is accepted, it would do incalc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e true signification of clause (iv) of Explanation to section 115J, it would undermine the very fiscal mission of section 115J(1) not to speak of the corresponding revenue loss throwing away the anticipated mobilisation of additional resources. If the progressive tax policy aimed at mopping up additional resources were to be given its pride of place as envisaged, then there is no escape from the CBDT Circular No. 495, dated 22-9-1987 which lays down the mode of adjustment in relation to clause (iv) of Explanation to section 115J of the Income-tax Act. 32. It may also be mentioned that section 115J of the Income-tax Act read with section 205(1)(i)(b) of the Companies Act was introduced with a view to suppressing the mischief of section 80VVA and to advance the remedy of collecting the minimum tax from the prosperous zero-tax companies. The issue is, therefore, governed by the Mischief Rule enunciated in Heydon's case. The Mischief Rule in Heydon's case was examined by the Supreme Court in the case of Dr. Baliram Waman Hiray v. Mr. Justice B. Lentin [1989] 176 ITR 1. The following principles enunciated in Heodon's case, and firmly established, are still in full force and effect, vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l income is deemed to be 30% of the book profit, applies only for purposes of section 115J and it does not extend beyond that. This fiction has been created for a definite purpose and it would operate within its field for which it is created. In the case of CIT v. Mother India Refrigeration Industries (P.) Ltd. [1985] 155 ITR 711, the Supreme Court held that the legal fictions are created only for some definite purposes and these must be limited to those purposes only and should not be extended beyond that legitimate field. The purpose of creating a legal fiction in section 115J is to levy tax in respect of companies whose book profit computed in accordance with the provisions of the Income-tax Act are less than 30%. Therefore, there is every need to construe the legal fiction strictly, without relating it to other provisions of the Income-tax Act like section 32(2) which cease to operate the moment section 115J is invoked. 34. A careful reading of clause (b) of the first proviso to sub-section (1) of section 205 of the Companies Act, 1956, shows that loss or depreciation, whichever is less, is deducted with a view to declaring dividend. However, under section 115J of the Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rried forward under the normal provisions of the Income-tax Act would not be affected because of operation of section 115J(1). In other words, section 115J(2), operating within the parameters of section 115J(1), provides for a relation in relation to determination of losses/allowances to be carried forward under the other provisions of the Income-tax Act. Accordingly, the language employed in section 115J(2) makes it abundantly clear that the process of determination of depreciation to be carried forward under section 32(2) is independent and not one within the scheme of section 115J(1). Section 115J(2) provides a relaxation to the legal fiction created by section 115J(1) to enable the companies to have the benefit of carry forward of depreciation under the Income-tax Act since clause (iv) of Explanation to section 115J permits of adjustment of other past losses or unabsorbed depreciation, whichever is less. The very fact that a company is entitled to carry forward depreciation in full under section 115J(2) bears ample testimony to the inexorable finding that the adjustment contemplated under clause (iv) of Explanation to section 115J cannot be depreciation in full as contended by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Vegetable Products Ltd. The interpretation of a statute favourable to the assessee is invoked when there is some ambiguity in a statute and the statute is capable of two or more interpretations. In the case before us, the learned counsel for the appellant himself has admitted that there is no ambiguity in the statute. The Income-tax Appellate Tribunal in the case of Steel Authority of India Ltd. has also given a clear finding that the provisions of section 115J of the Income-tax Act read with section 205(1)(i)(b) of the Companies Act are without any ambiguity, there is, therefore, no question that survives for adopting the interpretation which is favourable to the assessee. 38. To conclude, we are of the view that the appellant is entitled to deduction of depreciation or loss, whichever is less, only in the eventuality when in a given year there is a loss as well as depreciation, in such a case, the lesser of the amounts will be allowed to be deducted as per the provisions of the Income-tax Act. However, in case there is a profit in a year but after adjustment of depreciation it results in a loss, no adjustment in book profit under section 115J can be allowed. 39 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not taken into account the provisions of the Income-tax Act in which 'depreciation' and 'loss' have two distinct meanings. 41. We have also carefully gone through CBDT's Circular No. 495, dated 22-9-1987. We find the examples to illustrate the new provision more appropriate than the examples given by the learned author Sri Datta. Regarding the Circulars of the CBDT, it is settled law that the Board's circulars are binding on the department in the administration or implementation of a provision. In this regard, our view is strengthened by the decision of the Supreme Court in K. P. Varghese's case. In the said decision, the Hon'ble Supreme Court had considered, while interpreting section 52(2) of the Income-tax Act, two circulars of the Board issued on 7-7-1964 and 14-1-1974. It was laid down by the apex court that these two circulars of the CBDT are binding on the tax department in administrating or executing the provisions enacted in sub-section (2). Quite apart from their binding character, these circulars were held to be clearly in the nature of " comtemporanea expositio " furnishing legitimate aid in the construction of sub-section (2). The rule of construction by reference to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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