TMI Blog2007 (11) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... nk, for arriving at book profit under the provision of section 115JA. The Assessing Officer treated the amount set aside for paying taxes in foreign countries as provision for unascertained liabilities. The applicant filed an appeal against the assessment order before the Commissioner of Income-tax (Appeals)-XLVI, Mumbai, who, vide his order dated January 8, 2001, confirmed the disallowance of fees paid to Master Card, exchange loss and the addition of Rs. 4,57,57,000. The appellate order held that under clause (a) of the Explanation to sub-section (2) of section 115JA, any amount laid out as income-tax paid or payable has to be added to the book profit, and that this provision makes no distinction between tax payable by foreign branches and tax payable in India, nor does it exempt foreign tax liability. Aggrieved by the appellate order, the applicant preferred a second appeal before the Mumbai Bench of the Income- tax Appellate Tribunal ("the ITAT"). Being a public sector undertaking, the applicant also sought the approval of the Committee on Disputes ("COD") for pursuing the appeal before the Income-tax Appellate Tribunal. The COD gave permission to the applicant to pursue th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions 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 of April, 1997 but before the 1st day of April, 2001 (hereafter in this section referred to as the relevant previous year) is less than thirty per cent, of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent. of such book profit. (2) Every assessee, being a company, shall, for the purposes of this section prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956) ' Explanation.— For the purposes of this section, 'book profit' means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by— (a) the amount of income-tax paid or payable, and the provision therefore ; or (b) the amounts carried to any reserves by whatever name called; or (c) the amount or amounts set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t years 1997-98 to 2000-01. According to this provision, if the total income of a company is less than thirty per cent. of its book profit, then thirty per cent, of such book profit shall be deemed to be the taxable income of that company. Sub-section (2) of section 115JA requires a company to prepare its profit and loss account accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. The Explanation to this sub-section states "book profit" means net profit as shown in the profit and loss account, as increased, inter alia, by the amount of income-tax paid or payable and the provision made for the same. The Central Board of Direct Taxes Circular No. 763, dated February 18, 1998 ("1998") elaborating the scope of this section, states that the number of companies either paying no taxes or paying marginal taxes has of late increased. Therefore, section 115JA has been inserted so as to levy minimum tax ("minimum alternative tax" or "MAT") on such companies. It is noticed that prior to the insertion of section 115JA, a similar provision for levying minimum tax on book profit, namely, section 115J, had been made from the assessment year 1988-89, but was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account while computing the book profits of the company. We have already observed from the Central Board of Direct Taxes circular dated September 22, 1987, that the stated reason for levying tax on book profit was that, even some profit-making companies were paying little or no taxes at all, taking advantage of various deductions and exemptions, even though they had the capacity to pay taxes. The "ability to pay" has been used in the said circular in this sense. The observation of the Supreme Court in Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 also confirms this view. The court in that case had the occasion to refer to the object of introducing section 115J. noted the following portion of the Budget Speech of the Finance Minister (at page 279) "It is only fair and proper that the prosperous should pay at least some tax. The phenomenon of so-called 'zero-tax' highly profitable companies deserves attention. . . . I now propose to introduce a provision whereby every company will have to pay a 'minimum corporate tax' on the profits declared by it in It own accounts." 8. The court observed: "The above speech shows that the income-tax authorities were unable to bring cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) that income-tax paid or payable for which provision has been made in the profit and loss account, shall be added to the net profit. We are of the view that in the context in which clause (a) of the Explanation occurs, the expression "income-tax" in clause (a) should be referable to the profits reflected in the profit and loss account. 10 Learned counsel appearing for the applicant places strong reliance on clause (43) of section 2 of the Act and contends that "tax" means income- tax chargeable under the provisions of the Act. Section 2(43) reads as follows : "In this Act, unless the context otherwise requires,— (43) 'tax' in relation to the assessment year commencing on the 1st day of April, 1965, and any subsequent assessment year means income-tax chargeable under the provisions of this Act, and in relation to any other assessment year income-tax and super-tax chargeable under the provisions of this Act prior to the aforesaid date and in relation to the assessment year commencing on the 1st day of April, 2006, and any subsequent assessment year includes the fringe benefit tax payable under section 115WA." 11 Section 2 which is a definition or interpretation secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strict the scope of the expression "income-tax" to Indian income-tax only. As the applicant is a resident of India, income earned by its branches abroad would also be chargeable to tax under clause (c) of sub-section (1) of section 5 of the Act. We do not find any dispute about this. In fact, the applicant, in computing its total income, had included income earned by its foreign branches, but had claimed exclusion of this amount from the total income as double taxation relief in terms of article 7 of the relevant agreements on avoidance of double taxation, read with section 90 of the Act. The said article 7 provided that taxation of the income of permanent establishment had to be made by the county where the permanent establishment was located. The Supreme Court in the case of Union of India v. Azadi Bachno Andolan [2003] 263 ITR 706, 726 held : "The challenge being only to the exercise of the power emanating from the section, we are of the view that section 90 enables the Central Government to enter into a DTAC with the foreign Government. When the requisite notification has been issued thereunder, the provisions of sub-section (2) of section 90 spring into operation ..... X X X X Extracts X X X X X X X X Extracts X X X X
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