TMI Blog2013 (3) TMI 414X X X X Extracts X X X X X X X X Extracts X X X X ..... profit of the company. It is perfectly open to the legislature to prescribe how the book profit of a company can be computed and this it has done by first enacting that the book profit should be the figure of the profit as per the profit and loss account prepared in accordance with parts II and III of the Companies Act and then by prescribing, in Explanation 1, the items by which the said book profit may either be increased or reduced. Section 4 of the Income Tax Act, 1961 lays the charge of tax on the total income of the previous year of every person. Section 2(45) defines "total income" as meaning "the total amount of income referred to in section 5, computed in the manner laid down in this Act". To challenge the retrospectivity of the amendment it is necessary for the petitioner to show that the retrospective operation so completely alters the character of the tax as to take it outside the limits of the entry which gives the legislature competence to enact the law. Section 115JB is not a beneficial provision intended to give a fiscal incentive to the assessee as it targeted corporate entities for imposing a Minimum Alternate Tax on their book profit. Therefore, assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B of the Act. This section was inserted into the Act by the Finance Act, 2000 w.e.f. 01.04.2001. It made special provision for payment of tax by certain companies. The gist of the section, shorn of the details, is that certain companies were liable to pay tax on their "book profit" if the total income computed in accordance with the provisions of the Act was less than 18% of its book profit. In that case, book profit was deemed to be the total income of such companies. These companies were required to prepare their profit and loss account in accordance with the provisions of parts II and III of Schedule VI to the Companies Act, 1956. Explanation 1 to the section permitted certain adjustments to be made to the figure of book profit as shown in the profit and loss account prepared as per the Companies Act. The first part of the Explanation provided for certain additions to be made to the book profit and the second part provided for certain reductions to be made from the book profit. In the present petition we are not concerned with the second part, but are concerned only with the first part of Explanation 1 which provided for certain upward adjustments to the book profit. For the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeting an unascertained liability. The matter ultimately reached various benches of the Income Tax Appellate Tribunal and on account of the importance of the issue, a Special Bench of the Tribunal was constituted which ruled in JCIT v. Usha Martin Ltd. [2006] 105 TTJ (Kol.) 543 (SB) that such a provision cannot be considered as a provision for meeting an unascertained liability and that in truth and substance it was a provision for the diminution of the value of the debt and therefore, it fell outside clause (e) of the Explanation and the book profit cannot be increased by the amount of the provision. This view of the Special Bench of the Tribunal was upheld by the Delhi High Court in a case where a similar issue had arisen and this judgment is reported as CIT v. Eicher Ltd. [2006] 287 ITR 170. The controversy was eventually resolved by the Supreme Court in the judgment reported as CIT v. HCL Comnet Systems Services Ltd. [2008] 305 ITR 409. This judgment was rendered on 23.09.2008. It was observed as under: - "For the purposes of section 115JA, the Assessing Officer can increase the net profit determined as per the profit and loss account prepared as per Parts II and III of Sch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 45. Amendment of section 115JB - In section 115JB of the Income-tax Act,- (a) in sub-section (1), with effect from the 1st day of April, 2010,- (i) for the words, figures and letters "the 1st day of April, 2007", the words, figures and letters "the 1st day of April, 2010" shall be substituted; (ii) for the words "ten per cent.", at both the places where they occur, the words "fifteen per cent." shall be substituted; (b) in sub-section (2), after the second proviso, in Explanation 1, after clause (h), for the words, brackets and letters "if any amount referred to in clauses (a) to (h) is debited to the profit and loss account, and as reduced by-", the following shall be substituted and shall be deemed to have been substituted with effect from the 1st day of April, 2001, namely:- "(i) the amount or amounts set aside as provision for diminution in the value of any asset, if any amount referred to in clauses (a) to (i) is debited to the profit and loss account, and as reduced by,-". " The notes on clauses appended to the Bill provided as follows: - "Clause 45 of the Bill seeks to amend section 115 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a new clause (i) in Explanation 1 after sub-section (2) of the said section so as to provide that if any provision for diminution in the value of any asset has been debited to the profit and loss account, it shall be added to the net profit as shown in the profit and loss account for the purpose of computation of book profit. Similar amendment is also proposed in section 115JA of the Income-tax Act by way of insertion of a new clause (g) in the Explanation after sub-section (2) of the said section. The amendment to section 115JA is proposed to be made effective retrospectively from 1st day of April, 1998 and will, accordingly, apply in relation to assessment year 1998-99 and subsequent years. The amendment to section 115JB is proposed to be made effective retrospectively from 1st day of April, 2001 and will, accordingly, apply in relation to assessment year 2001-02 and subsequent assessment years." 5. The petitioner filed its returns of income for the assessment years 2002-03, 2003-04 and 2009-10 on 31.10.2002, 28.11.2003 and 29.09.2009 respectively. It is averred in the petition that the petitioner was advised to re-compute its book profit for these years by taking into ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be added to the book profit. It is well settled that income tax is only one tax on the total income of the assessee. The book profit of a company as shown in the profit and loss accounts prepared in accordance with the Companies Act, 1956 and as adjusted by the various clauses of Explanation 1 is deemed to be the total income of the company on which tax is payable. It is, therefore, a misnomer to refer to the amendment as imposing a new tax or levy. Since the amendment does not provide for any new levy of income tax, there is no question of it being struck down on the ground of retrospectivity. 9. The argument of the petitioner that no justification has been shown for introducing the amendment is also unacceptable. It was pointed out that the "statement of objects and reasons" to the Finance (No.2) Bill, 2009 did not contain anything to show why clause (i) was introduced into the Explanation. The memorandum explaining the provisions of the Finance Bill, 2012 (2012) 342 ITR (St) 234 at page 265 contained a detailed justification as to why certain amendments were being proposed in section 9 of the Act in order to rationalise the international taxation provisions. There is, it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of objects and reasons for the validation Act under challenge showed that the intention of the legislature was rather to render the decision of the High Court infructuous than to correct any infirmity in the legal position. Rejecting the argument, the court observed as under:- It was then urged on behalf of the respondents that a perusal of the Statement of Objects and Reasons for the Validation Act shows that the intention of the legislature was rather to render the decision of the High Court infructuous than to correct any infirmity in the legal position. For this, reliance was sought to be placed on the Statement of Objects and Reasons of the impugned enactment. It is well settled by the decisions of this Court that when a validity of a particular statute is brought into question, a limited reference, but not reliance, may be made to the State of Objects and Reasons. The Statement of Objects and Reasons may, therefore, be employed for the purposes of comprehending the factual background, the prior state of legal affairs, the surrounding circumstances in respect of the statute and the evil which the statute has sought to remedy. It is manifest that the Statement of Objects ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or to the amendment. It is thus only an external aid to construction and by no means a touchstone to judge the validity or constitutionality of the statute. That should be decided on the terms of the statute and the statement of objects and reasons can have no decisive influence on the question. Reading more into the statement of objects and reasons would lead to this absurd result, namely, that if sufficient justification for the law is shown in the statement of objects and reasons, then the law must be held to be valid and constitutional irrespective of the question whether it offends the relevant provisions of the Constitution or exceeds the judicially recognised limitations on the legislative powers. It would result in an absurd situation which cannot be countenanced, as pointed out in the judgment of the Federal Court (supra). 13. A statutory amendment may be brought into force either prospectively or retrospectively. A retrospective taxation, by its very nature, is intended to operate on conditions that were already existing. In Rai Ramkishna v. State of Bihar [1963] 50 ITR 171=AIR 1963 SC 1667, a Constitution bench of the Supreme Court was dealing with the challenge to a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vate) Ltd. v. The Union of India [1954] 12 S.C.R. 139.. 13. In view of the recent decisions of this Court Mr. Sastri also concedes that taxing statutes are not beyond the pale of the constitutional limitations prescribed by Articles 19 and 14. and he also concedes that the test of reasonableness prescribed by Art. 304(b) is justiciable. It is, of course, true that the power of taxing the people and their property is an essential attribute of the Government and Government may legitimately exercise the said power by reference to the objects to which it is applicable to the utmost extent to which Government thinks it expedient to do so. The objects to be taxed so long as they happen to be within the legislative competence of the legislature can be taxed by the legislature according to the exigencies of its needs, because there can be no doubt that the State is entitled to raise revenue by taxation. The quantum of tax levied by the taxing statute, the conditions subject to which it is levied, the manner in which it is sought to be recovered, are all matters within the competence of the legislature, and in dealing with the contention raised by a citizen that the taxing statute contrav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nution in the value of an asset, Parliament in its wisdom thought that its intention to impose a Minimum Alternate Tax (MAT) on companies which earned profits and declared dividends but did not pay any tax (after availing of all the allowances and reliefs permitted under the Income Tax Act) would be better effectuated by introducing a provision to the effect that even a provision made for diminution in the value of any asset would be added to the book profit. The statutory basis of the judgment of the Supreme Court in HCL Comnet (Supra) was changed; whereas the Supreme Court pointed out the inadequacy of the existing clause (c) to cover a provision for the diminution in the value of any asset, the legislature sought to plug the lacuna by inserting clause (i) which permitted an upward adjustment of the book profit by the provision made for diminution in the value of any asset, which obviously included a debt. It is not unusual for the legislature to make amendments with retrospective effect to cure the lacuna pointed out by judicial decisions. In ITW Signode India Ltd. (supra) it was observed by the Supreme Court as follows:- A statute, it is trite, must be read as a whole. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear relevant to the assessment year commencing on or after [the 1st day of April, 2012] is less than [eighteen and one-half per cent] of its book profit, [such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of eighteen and one-half per cent." 17. Explanation 1 to the Section prescribes the manner in which the book profit of a company shall be computed and it is upon the book profit so computed, after giving effect to the said Explanation, that the tax is payable by the company. In other words it is the book profit adjusted in the manner prescribed by the Explanation 1 that is deemed to be the total income of the company. If this is the true position, it is difficult to accept the argument that the insertion of clause (i) with retrospective effect into Explanation 1 so completely alters the nature and character of the tax that it falls beyond the entry 82 in the Union List of the Constitution ("Taxes on income other than agricultural income") and consequently is beyond the competence of the legislature. 18. A case of some relevance to the present writ petiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company; it continues to remain so even after the retrospective amendment, the change being not in the nature and character of the tax, but on the quantum of the book profit/total income of the company on which it is charged. 19. Three judgments were predominantly relied upon by the counsel for the petitioner in the course of his arguments. The first judgment is that of A.N. Sen, J in Lohia Machines Ltd. Anr. v. Union of India Ors.,152 ITR 308. It is in fact the judgment of the minority. However, on the point relied upon by the counsel for the petitioner, the judgment of A.N. Sen, J, cannot be considered as a dissenting or minority judgment because on this point, no opinion was expressed by the majority, which opinion was articulated by Bhagwati, J. In that case, two questions fell for determination. The first was the validity of Rule 19A of the Income Tax Rules, 1962, which according to the assessee in that case, went far beyond Section 80J by excluding borrowed capital from the capital employed in the industrial undertaking. The second question which fell for consideration was the validity of the retrospective amendment made to Section 80J by the Finance (No.2) Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this kind of retrospective amendment which sought to defeat an accrued statutory right that was perceived to be "likely to affect the sanctity of any statutory provision and may create a state of confusion". It is also well to remember that in that case the legislature had earlier made an attempt to deny the relief granted by the Section, by enacting Rule 19A which was held to be invalid as being a case of excessive delegation. It was this rule that was sought to be validated by making a retrospective amendment to the Section itself and the Section was so amended as to take away the benefit that had earlier accrued to the assessee, in precisely the same manner in which Rule 19A had done albeit invalidly. Several assessees had planned their affairs in such a manner as to obtain the benefit of Section 80J, more so when Rule 19A had been held to be invalid as being a case of excessive delegation. In the majority of the cases, the assessees had succeeded and were allowed the relief under Section 80J in respect of the capital employed which included the borrowed capital also, which Rule 19A had unsuccessfully sought to exclude. The inequitable and onerous nature of the retrospective am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Such retrospective taxation imposes an unjust and unwarranted accumulated burden on the assessee for no fault on his part and the assessee has to face unnecessarily without any just reason very serious financial and other problems. Imposition of any tax with retrospective effect for years which no such tax was there, cannot also be considered to be just and reasonable from the point of view of the Revenue. The years for which levy is sought to be imposed with retrospective effect had already passed and there cannot be any proper justification for imposition of any fresh tax for those years. Such retrospective taxation is likely to disturb and unsettle the settled position; and because of such imposition of retrospective levy for the years for which there was no such levy, assessments for those years which might already have been completed and concluded will get upset. If the State is in need of more funds, the State, instead of seeking to levy any tax with retrospective effect, can always take appropriate steps to collect any larger amount so required by the imposition of higher taxes or by other appropriate methods. I have already observed that Validating Acts which seek to val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss account. Liabilities relating to expenditure which has been incurred or which has accrued in respect of expenses which are otherwise deductible in computing income will not be added back. The amount so arrived at is to be reduced by- (i) amounts withdrawn from reserves if any, such amount is credited to the profit and loss account; (ii) the amount of income to which any of the provisions of Chapter III applies, if any such amount is credited to the profit and loss account; and (iii) the amount of any brought forward losses or unabsorbed depreciation whichever is less as computed under the provisions of section 205(1)(b) of the Companies Act, 1956, for the purpose of declaration of dividends. Section 205 of the Companies Act requires every company desirous of declaring dividend to provide for depreciation for the relevant accounting year. Further, the company is required under section 205 to set off against the profit of the relevant accounting year, the depreciation debited to the profit and loss account of any earlier year(s) or loss whichever is less. 36.3 Section 115J, therefore, involves two processes. Firstly, an assessing authority has to determine t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll follow same accounting policies and standards as are followed for preparing its statutory account. 43.4 The amended provision discontinues the system of allowing credit for MAT in future. However, the taxes paid under the existing provisions of section 115JA shall get the credit. 43.5 The export profits under sections 10A, 10B, 80HHC, 80HHE and 80HHF are kept out of the purview of this provision as these are being phased out. The new provisions also exempt companies registered under section 25 of the Companies Act. 43.6 Certificate from an auditor has also been prescribed with a view to ascertaining the extent of book profits. 43.7 These amendments will take effect from 1st April, 2001, and will, accordingly apply in relation to the assessment year 2001-2002 and subsequent years. " 23. There is a marked difference in the nature and character of a Section such as Section 80J which was considered by A.N. Sen, J in Lohia Machines (supra) and those of Section 115J/115JB of the Act. Whereas Section 80J was a Section intended to give a fiscal incentive or relief for assessees who set up industrial undertakings in notified backward areas, Section 115J/115J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction allowed while computing the book profit of the company as a benefit or relief granted to it in the same manner in which Section 80J conferred a benefit upon an assessee who set up an industrial undertaking in a notified backward area. The scheme and purpose are so different that a comparison of both the provisions would be totally off the mark. Explanation 1 provided for computation of the book profit and initially there was admittedly no provision to add back the provision made in the profit and loss account for diminution in the value of an asset. It was wrongly assumed by the tax authorities that a provision for bad and doubtful debts was a provision for meeting an unascertained liability. The true position in law was pointed out by the Supreme Court in its judgment in HCL Comnet (supra); thereafter the legislature stepped in by introducing Clause (i). The reason was to take a lesson out of the judgment of the Supreme Court and to deny the deduction of a provision made not only for bad and doubtful debts but also for the diminution in the value of any asset. It must be recalled that the argument of the companies, accepted by the Supreme Court, was that a provision for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsel for the petitioner. That is a decision of the Bombay High Court in CIT v. Hico Products (P.) Ltd., [1991] 187 ITR 517. A Division Bench of the High Court conceded that a taxing statute which validates the imposition of a tax earlier held invalid by a court of law or an amendment to remove the lacuna and clarify the legislative intent, even if it is enacted retrospectively can be considered as justified. It however, held that there should be compelling reasons for making a retrospective amendment in public interest and in the absence of reasons of public interest it runs the risk of being unreasonable or arbitrary and violative of Articles 14 and 19(1)(g) of the Constitution. That was also a case of retrospective amendment made w.e.f. 1.04.1962 by an amending act passed in 1980, to amend Section 35 of the Income Tax Act. This judgment of the Bombay High Court was reversed in appeal by the Supreme Court in CIT v. Hico Products (P) Ltd., [2001] 247 ITR 797 (SC). The Supreme Court held that the retrospective amendment which provided that where a deduction for scientific expenditure had been allowed in respect of a capital asset to an assessee under Section 35, no depreciation shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking companies with the ability to pay tax on account of earning substantial profits, to pay tax and thereby contribute to the fiscal health of the economy. If this is not in the larger public interest, we do not see what can be. 26. We may now turn to the third decision on which heavy reliance was placed on behalf of the petitioner. That is the judgment of the Gujarat High Court in Avani Exports and Ors. v. CIT Ors., [2012] 348 ITR 391. The amendment made to section 80HHC of the Income Tax Act by the Taxation Laws (2nd Amendment) Act, 2005 was challenged to the extent of its retrospectivity. Several grounds were argued before the Gujarat High Court but so far as the present petition before us is concerned we need to refer only to the challenge to the retrospectivity of the amendment. The High Court upheld the prospective nature of the amendment but struck it down to the extent that it operated retrospectively. It observed that although in a taxing statute laxity is permissible and a benefit already given to the assessees can be taken away or curtailed, that can be done only with prospective effect and not retrospectively. The Court noticed that a citizen has a right to arrang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessees on the interpretation of the Section was upheld by the Tribunal. That view was sought to be nullified by an amendment with retrospective effect, on the ground that it was never the intention of the Parliament to allow such a benefit. Some further conditions which were not there at the earlier date were sought to be imposed by the retrospective amendment. The main objection of the High Court, with respect, appears to be that the order of the Tribunal could have been challenged by the revenue before the High Court and the Supreme Court before proceeding to change the law and to impose further conditions with retrospective effect. We do agree that the view expressed by the Income Tax Appellate Tribunal on the interpretation of statutory provisions may not be final and may not enjoy the same authority as that of a High Court or Supreme Court, and this we say with due respect to the Tribunal, but we are not able to take the proposition forward by saying that the revenue is bound to wait till the last word is said by the High Court or Supreme Court before changing the law with retrospective effect. It need not be so uniformly in all cases. Section 80HHC was a very imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court and on further appeal to the Supreme Court, one of the principal contentions advanced on behalf of the dealer was that the retrospective operation of entry 47A was violative of article 19(1)(g) of the Constitution as it imposed an unreasonable restriction on the right of the appellants to carry on their trade and business. Rejecting the contention, H.R. Khanna, J, speaking for the Bench of three judges noted that the amending act was intended to cure an infirmity as revealed by the judgment of the High Court and to validate the past levy and collection of tax in respect of certain kinds of non-lubricating mineral oils, including furnace oil. The legislature, it was noticed, for this purpose split the original entry 47 into two entries, i.e., 47 47A and made the position clear that furnace oil would also suffer the same rate of tax as non-lubricating mineral oil. Rejecting the other argument that the tax levied by entry 47A was a fresh tax, it was held that since the object of the amending act was "to remove and rectify the defect in phraseology or lacuna of other nature and also to validate the proceedings, including realization of tax, which have taken place in pursua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the amendment. The amending Act was made retrospective to validate - notwithstanding any judgment, decree or order to the contrary - as if the definition as amended was always enforced. It was held that the amendment was not an encroachment on the judicial power by the legislature. The Supreme Court held that the amendment removed the basis of the decision rendered by the High Court so that the decision could not have been given in the altered circumstances. The present case is also not one of encroachment of the legislature upon the judicial power. Parliament did not attempt to validate the add-back of the provision for bad and doubtful debts by validating the action of the income tax authorities without changing the statutory basis. The provision for bad and doubtful debts, which was described by the Supreme Court in HCL Ltd. (supra) as one for diminution in the value of an asset, i.e., debt, was provided for as a separate item to be added to the book profit of the company by insertion of clause (i) with retrospective effect. If clause (i) had always been there in Explanation 1, the Supreme Court would not have held that the provision for bad and doubtful debts cannot be add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting case MANU/SC/2021/1998: [1998] 231 ITR 814 (SC) and the period for reopening such assessments had become time barred. In any event the 1998 amendment cannot be construed as authorizing the revenue authorities to reopen assessments when the reopening is already barred by limitation. The amendment does not seek to touch on the periods of limitation provided in the Act, and in the absence of any such express provision or clear implication, the legislature clearly could not be taken to intend that the amending provision authorises the Income Tax Officer to commence proceedings which before the new Act came into force, had, by the expiry of the period provided become barred-S.S. Gadgil v. Lal Co. MANU/SC/0122/1964 : [1964] 53 ITR 231 (SC) ; see also J.P. Jani, ITO v. Induprasad Devshanker Bhatt (supra); K. M. Sharma v. ITO MANU/SC/0312/2002 : [2002] 254 ITR 772 (SC). Different considerations would arise if, by the amendment even final assessments were unambiguously sought to be opened-Commercial Tax Officer v. Biswanath Jhunjhunwalla, MANU/SC/0097/1997 : AIR 1997 SC 357 . That is not the case here." These observations are a recognition of the consequence that is inevitable in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of tax paid by him or on his behalf or treated as paid by him or on his behalf for any assessment year exceeds the amount with which he is properly chargeable under the Act for that year, he shall be entitled to a refund of the excess. Section 239 says that the claim for refund shall be made in the prescribed form, verified in the prescribed manner. Under clause (c) of sub-section (2), the claim has to be preferred within a period of one year from the last day of the assessment year. In the petitioner's case such periods have expired in respect of the three assessment years i.e. 2002-03, 2003-04 and 2009-10. The petitioner however, is not without remedy as Section 119(2)(b) empowers the CBDT, if it considers desirable or expedient so to do for avoiding genuine hardship in any case or class of cases, by general or special order, authorise any income tax authority (other than CIT (Appeals)) to admit an application or claim for any exemption, deduction, refund or any other relief under this Act after the expiry of the period specified by or under this Act for making such application or claim and deal with the same on merits in accordance with law. It is open to the petitioner to a ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
