TMI Blog2013 (7) TMI 323X X X X Extracts X X X X X X X X Extracts X X X X ..... uch companies as a separate class has a direct nexus with the object of ensuring that all corporate assessees having profits pay at least the minimum specified tax - Upon a plain reading of section 115J of the Act, the income calculated on the basis of book profits squarely falls within the definition of total income as defined under the Act. Section 115JA only provides for an alternate method for calculating tax and thus, provides a measure for purposes of levying tax. The same cannot be confused with the subject matter of the levy which continues to be tax on income - Section 115J of the Act only creates a legal fiction to supplant the measure of total income which is chargeable to tax. The non obstante clause indicates that the provisions of 115JA of the Act would override the other provisions of the Act for computation of taxable income in certain cases falling within the sweep of section 115JA. Section 115JA of the Act is a special provision to calculate taxable income in certain cases. The levy of income tax is under Section 4 of the Act, which is the charging section. Section 115J of the Act only creates a legal fiction to supplant the measure of total income which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nged the provisions of Section 115JA of the Act as being ultra vires the Constitution of India. 3. The petitioner has also challenged the provisions of Section 115JAA of the Act which provides for grant of credit in respect of tax paid by an assessee under section 115JA of the Act from the tax payable in subsequent years subject to a maximum period of 5 succeeding assessment years and subject to the assessee paying the minimum alternative tax calculated in accordance with Section 115JA of the Act for the respective years. In terms of Section 115JAA of the Act, the unabsorbed credit would lapse after 5 assessment years. 4. It has been contended on behalf of the petitioner that Section 115JA of the Act provides for payment of minimum alternative tax and the same is violative of Article 265 read with Entry 82 of List I of Schedule VII to the Constitution of India, as it is contended that the tax as computed as per section 115JA of the Act is not a tax on income as per the provisions of the Act. It is further contended that the computation of income under section 115JA of the Act is arbitrary and discriminatory and lacks certainty. It is contended that the provisions of Section 115 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that provisions of Section 115JAA indicate that the tax as levied under Section 115JA of the Act only amounts to forcible collection of a deposit even though no tax is payable by an assessee. The tax computed on the basis of section 115JA of the Act is contended to be only a deposit which an assessee is forced to make and the credit for which is available in subsequent years and that too contingent on the assessee having any taxable income as computed under the normal provisions of the Act during the five succeeding years. This imposition of deposit being interest free is contended to be arbitrary and thus unconstitutional. 7. We have heard the learned counsel for the petitioner at length. 8. The provisions of Section 115JA and Section 115JAA of the Act are relevant for the purpose of considering the challenge laid by the petitioner and are quoted below: 115JA.- Deemed income relating to certain companies.- (1) Notwithstanding anything contained in any other provisions of this Act, where in the case of an assessee, being a company, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... previous year (including the relevant previous year), the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation; or (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; or (iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account. Explanation. For the purposes of this clause, the loss shall not include depreciation; or (iv) the amount of profits derived by an industrial undertaking from the business of generation or generation and distribution of power; or (v) the amount of profits derived by an industrial undertaking located in an industrially backward State or district as referred to in sub-section (4) and sub-section (5) of section 80-IB, for the assessment years such industrial undertaking is eligible to claim a deduction of hundre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section (1) shall be the difference of the tax paid for any assessment year under subsection (1) of section 115JA and the amount of tax payable by the assessee on his total income computed in accordance with the other provisions of this Act: Provided that no interest shall be payable on the tax credit allowed under sub-section (1). (3) The amount of tax credit determined under sub-section (2) shall be carried forward and set off in accordance with the provisions of sub-section (4) and sub-section (5) but such carry forward shall not be allowed beyond the fifth assessment year immediately succeeding the assessment year in which tax credit becomes allowable under sub-section (1). (4) The tax credit shall be allowed set-off in a year when tax becomes payable on the total income computed in accordance with the provisions of this Act other than section 115JA. (5) Set off in respect of brought forward tax credit shall be allowed for any assessment year to the extent of the difference between the tax on his total income and the tax which would have been payable under the provisions of sub-section (1) of section 115JA for that assessment year. (6) Where as a result of an order un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rought forward from earlier year(s) - 1,35,000 69,000 99,000 1,29,000 51,000 (12) Extent of the set off of brought forward tax credit - 66,000 - - 78,000 51,000 (13) Tax to be paid after set off - 54,000 - - 1,62,000 3,99,000 (14) Tax credit to be carried forward after set off 1,35,000 69,000 99,000 1,29,000 51,000 Nil In the illustration as given above, the assessee s income during the first year is assumed as nil and, therefore, under the normal provisions of the Act, the assessee would not be liable to pay any tax. However, as the assessee has declared profits as per its Profit and Loss Account, the assessee would be liable to pay tax on 30% of the book profits as adjusted in accordance with clauses (a) to (f) and clauses (i) to (ix) of the Explanation to Section 115JA(2) of the Act. This as per the illustration has been assumed to be Rs. 15,00,000/- and 30% of such adjusted book profits would be deemed to be total income chargeable to tax. Thus, the assessee would pay tax on Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 30,000/- being the difference between the tax as computed under the normal provisions and tax as computed on the basis of deemed income. Since, the assessee was entitled to claim a similar credit for the tax paid in the first year of a sum of Rs. 1,35,000/- out of which only a credit of Rs. 66,000/- has been claimed in the second year and a credit of Rs. 69,000/- is still available, the assessee would now be entitled to claim a tax credit of Rs. 99,000/- being the sum of the credit available in respect of the taxes paid in the third year as well as the balance unabsorbed credit from the first year. 12. In the fifth year, the tax payable by the assessee under the normal computation exceeds the tax payable on deemed income under Section 115JA of the Act by a sum of Rs. 1,35,000/- and as the unabsorbed credit available to the assessee on account of the tax paid in the previous years is Rs. 51,000/- the assessee would be entitled to claim a set off of the entire amount of Rs. 51,000/- and would be liable to pay a tax of Rs. 3,99,000/- instead of Rs. 4,50,000/- as computed under the normal provisions of the Act. 13. Section 115JA of the Act provides for an alternate method of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hile it is true that a taxation law cannot claim immunity from the equality clause in Article 14 of the Constitution, and has to pass, like any other law, the equality test of that Article, it must be remembered that the State has, in view of the intrinsic complexity of fiscal adjustments of diverse elements, a considerably wide discretion in the matter of classification for taxation purposes. Given legislative competence, the legislature has ample freedom to select and classify persons, districts, goods, properties, incomes and objects which it would tax, and which it would not tax. So long as the classification made within this wide and flexible range by a taxing statute does not transgress the fundamental principles underlying the doctrine of equality, it is not vulnerable on the ground of discrimination merely because it taxes or exempts from tax some incomes or objects and not others. Nor the mere fact that a tax falls more heavily on some in the same category, is by itself a ground to render the law invalid. It is only when within the range of its selection, the law operates unequally and cannot be justified on the basis of a valid classification, that there would be a violat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or rates applicable. 18. The question whether restricting deductions available under the Act in respect of certain assessees whose taxable income calculated under the normal computational provisions of the Act falls below 30% of the profits declared by them in accordance with section 211 of the Companies Act 1956, falls foul of Article 14 of the Constitution of India has to be answered in light of the law as explained above. It is settled law that Article 14 does not forbid reasonable classification and the question whether any classification is reasonable has to be tested on the basis of whether the same bears a reasonable nexus with the object of the statute. A constitution bench of seven judges of the Supreme Court in the case of Budhan Choudhry v. State of Bihar: AIR 1955 SC 191 explained the scope of Article 14 of the Constitution of India as under: It is now well established that while Article 14 forbids class legislation, it does not forbid reasonable classification for the purposes of legislation. In order, however, to pass the test of permissible classification must be fulfilled, namely, (i) that the classification must be founded on an intelligible differentia whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of National Thermal Power Corporation Ltd v. Union of India Ors.: [1991] 192 ITR 187 (Del). This Court while rejecting the challenge to section 115J held as under: This provision, namely, section 115J, was brought in the statute book in an effort to tax what is commonly known as zero tax companies . These are companies which have, in fact, large profits in its books but, for the purpose of the Income-tax Act, by virtue of various deductions which have been claimed, very little taxable income is disclosed. It is in an effort to bring such types of companies within the taxable net that section 115J was inserted by Parliament. We are unable to agree with learned counsel for the petitioner that this provision is violative of articles 14 and 19 of the Constitution. 22. We are unable to appreciate the contention of the petitioner that provisions of Section 115JA are violative of Article 265 read with Entry 82 of List I of Schedule VII to the Constitution of India. Article 265 of the Constitution of India mandates that no tax shall be levied or collected except by authority of law . Entry 82 of List I of the Seventh Schedule to the Constitution of India reads as taxes on i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the field of tax legislation by considering the problem of devising the measure of taxation. This aspect has been dealt with in detail in Union of India Vs. Bombay Tyre International Ltd. 1983 4 SCC 210. Tracing the principles from the leading authority of A reference under the Government of Ireland Act, 1920 and Section 3 of the Finance Act (Northern Ireland) 1934, Re (1936) 2 All ER 111 passing through Ralla Ram Vs. Province of East Punjab AIR 1949 FC 81 and treading through the law as it has developed through judicial pronouncements one after the other, this Court has made subtle observations therein. It has been long recognized that the measure employed for assessing a tax must not be confused with the nature of the tax. A tax has two elements: first, the person, thing or activity on which the tax is imposed, and second, the amount of tax. The amount may be measured in many ways; but a distinction between the subject matter of a tax and the standard by which the amount of tax is measured must not be lost sight of. These are described respectively as the subject of a tax and the measure of a tax. It is true that the standard adopted as a measure of the levy may be indicative o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovides for an alternate method for calculating tax and thus, provides a measure for purposes of levying tax. The same cannot be confused with the subject matter of the levy which continues to be tax on income. 29. The non obstante clause indicates that the provisions of 115JA of the Act would override the other provisions of the Act for computation of taxable income in certain cases falling within the sweep of section 115JA. Section 115JA of the Act is a special provision to calculate taxable income in certain cases. The levy of income tax is under Section 4 of the Act, which is the charging section. Section 115J of the Act only creates a legal fiction to supplant the measure of total income which is chargeable to tax. Thus, indisputably, tax as computed on the basis of Section 115J of the Act is a tax on income. 30. The contention of the petitioner that the tax paid on the basis of computation under Section 115JA of the Act amounts to a compulsory deposit on which no interest is paid to the assessee is also misconceived. The tax as payable on income as computed under Section 115JA of the Act is a tax levied under the Act, albeit computed on the basis of the book profits of th ..... 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