Delhi High Court
M/S Ester Industries Limited vs Union Of India And Ors. on 9 July, 2013
Author: Vibhu Bakhru
Bench: Badar Durrez Ahmed, Chief Justice, Vibhu Bakhru
THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment delivered on: 09.07.2013
+ W.P.(C) 5513/1997
M/S ESTER INDUSTRIES LIMITED ..... Petitioner
versus
UNION OF INDIA AND ORS. ..... Respondents
Advocates who appeared in this case:
For the Petitioner : Mr R. Santhanam.
For the Respondents : None.
CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED, ACTING
CHIEF JUSTICE
HON'BLE MR JUSTICE VIBHU BAKHRU
JUDGMENT
VIBHU BAKHRU, J
1. This is a writ petition filed by the petitioner challenging the provisions of Section 115JA and 115JAA of the Income Tax Act, 1961 (hereinafter referred to as the 'Act') as being ultra vires Article 265, 300A, 14 & 19(1)(g) of the Constitution of India.
2. The petitioner is a public company incorporated under the Companies Act, 1956 and is, inter alia, engaged in the business of manufacture and sale of Polyester Chips, Polyester Film, Polyester Filament Yarn, Methanol and Engineering Plastics. The petitioner filed its return for the assessment year 1997- 98 showing an income of `12,42,63,001/-. However, the income tax payable by the petitioner for the said assessment year was shown as Nil on account of unabsorbed depreciation which was brought forward from previous assessment W.P.(C) 5513/1997 Page 1 of 21 years. The Finance (No. 2) Act, 1996 introduced Section 115JA in the Income Tax Act, w.e.f. 01.04.1997 which provided for levy of a minimum tax on assessees who although had declared profits as per their books but were not liable to pay tax on the profits as disclosed in their final accounts on account of certain deductions available under the Act. The petitioner is one such company who although, earning substantial profits, is not be liable to pay tax under the normal computation provisions of the Act on account of unabsorbed depreciation brought forward from previous years. Aggrieved by enactment of Section 115JA providing for an alternate measure of taxable income, the petitioner has challenged 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 115JA of the Act infact withdraws the concessions and deductions, which are available under the Act, in respect of certain assessees and the same amounts to a W.P.(C) 5513/1997 Page 2 of 21 violation of Article 14 of the Constitution of India inasmuch as the assessees in respect of whom Section 115JA of the Act is applicable are treated differently from other assessees. Further, the levy under Section 115JA of the Act is also challenged as being arbitrary as tax is payable with respect of "book profits"
which is contended to be outside the definition of "income" as defined under Section 2(24) of the Act. It is also contended that the tax under Section 115JA of the Act is also outside the scope of "tax" as defined under Section 2(43) of the Act and income as calculated under section 115JA of the Act would also not fall within the definition of "total income" as defined under Section 2(45) of the Act. It is submitted that the charge of tax under Section 4 of the Act contemplates charge on income as computed under different heads and in accordance with Section 14 to 80 under the Act after adjusting deduction under Chapter VIA of the Act and tax can only be levied on total income as computed under such provisions of the Act. It is contended that levy of any tax other than on the basis of income as computed in terms of Section 14 to 80 of the Act would be arbitrary and thus unconstitutional.
5. It is submitted that levy of tax on the basis of section 115JA of the Act apparently nullifies other provisions of the Act and ignores the various heads of income including incomes which are otherwise exempt under the Act. Thus, the provisions of section 115JA of the Act are contended to be arbitrary and contrary to the law enacted for levying tax on income. It is submitted by the petitioner that levy of tax on the basis of book profits is arbitrary as the assessee would not be aware at the time of earning income whether the tax would be computed under the normal provisions or under Section 115JA of the Act. It is contended that the levy of tax under Section 115JA of the Act is discriminatory as the assessee cannot choose to compute tax under the provisions which results in a lower W.P.(C) 5513/1997 Page 3 of 21 incidence of tax while the revenue can demand tax either under Section 115JA of the Act or under the normal provisions of the Act, whichever is higher.
6. In respect of section 115JAA of the Act, the petitioner has contended 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 of April, 1997 (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):W.P.(C) 5513/1997 Page 4 of 21
Provided that while preparing profit and loss account, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the profit and loss account laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956): Provided further that where a company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under the Act, the method and rates for calculation of depreciation shall correspond to the method and rates which have been adopted for calculating the depreciation for such financial year or part of such financial year falling within the relevant previous year.
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 therefor; or
(b) the amounts carried to any reserves by whatever name called; or
(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or
(d) the amount by way of provision for losses of subsidiary companies; or
(e) the amount or amounts of dividends paid or proposed; or
(f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies;
if any amount referred to in clauses (a) to (f) is debited to the profit and loss account, and as reduced by,--
(i) the amount withdrawn from any reserves or provisions if any such amount is credited to the profit and loss account:
Provided that, where this section is applicable to an assessee in any previous year (including the relevant W.P.(C) 5513/1997 Page 5 of 21 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 hundred per cent of the profits and gains under sub-section (4) or sub-section (5) of section 80-IB; or
(vi) the amount of profits derived by an industrial undertaking from the business of developing, maintaining and operating any infrastructure facility as defined in the Explanation to sub-section (4) of section 80-IA and subject to fulfilling the conditions laid down in that sub- section; or
(vii) the amount of profits of sick industrial company for the assessment year commencing from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986), and ending with the assessment year during which the entire net W.P.(C) 5513/1997 Page 6 of 21 worth of such company becomes equal to or exceeds the accumulated losses.
Explanation.--For the purposes of this clause, "net worth"
shall have the meaning assigned to it in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986); or
(viii) the amount of profits eligible for deduction under section 80HHC, computed under clause (a), (b) or (c) of sub-
section (3) or sub-section (3A), as the case may be, of that section, and subject to the conditions specified in sub- sections (4) and (4A) of that section;
(ix) the amount of profits eligible for deduction under section 80HHE, computed under sub-section (3) of that section. (3) Nothing contained in sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of sub-section (2) of section 32 or sub-section (3) of section 32A or clause (ii) of sub-section (1) of section 72 or section 73 or section 74 or sub-section (3) of section 74A. (4) Save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section."
"115JAA.- Tax credit in respect of tax paid on deemed income relating to certain companies.- (1) Where any amount of tax is paid under sub-section (1) of section 115JA by an assessee being a company for any assessment year, then, credit in respect of tax so paid shall be allowed to him in accordance with the provisions of this section.
(2) The tax credit to be allowed under sub-section (1) shall be the difference of the tax paid for any assessment year under sub-
section (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).W.P.(C) 5513/1997 Page 7 of 21
(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 under sub-section (1) or sub-
section (3) of section 143, section 144, section 147, section 154, section 155, sub-section (4) of section 245D, section 250, section 254, section 260, section 262, section 263 or section 264, the amount of tax payable under this Act is reduced or increased, as the case may be, the amount of tax credit allowed under this section shall also be increased or reduced accordingly."
9. The working of Section 115JA and 115JAA of the Act can be explained by the following illustration:-
Sl. Particulars Assessmentyear(s)
No.
Year1 YearII YearIII YearIV YearV YearVI
Rs. Rs. Rs. Rs. Rs. Rs.
(1) Total income (as Nil 4,00,000 5,00,000 2,00,000 8,00,000 15,00,000
computed in
normal course)
(2) Tax on total Nil 1,20,000 1,50,000 60,000 2,40,000 4,50,000
income (assumed at
30%)
(3) 'Book profit' as 15,00,000 6,00,000 20,00,000 10,00,000 18,00,000 35,00,000
determined after
making
adjustments in
W.P.(C) 5513/1997 Page 8 of 21
accordance with
clauses (a) to (f)
and clauses (i) to
(ix) of the
Explanation to
section 115JA(2)
(4) 30% of the 4,50,000 1,80,000 6,00,000 3,00,000 5,40,000 10,50,000
adjusted 'book
profits'
(5) Deemed income 4,50,000 1,80,000 6,00,000 3,00,000 5,40,000 10,50,000
under section
115JA
(6) Tax on deemed 1,35,000 54,000 1,80,000 90,000 1,62,000 3,15,000
income at the rate
of 30%
(7) Tax paid under 1,35,000 - 1,80,000 90,000 - -
section 115JA(1)
(8) Tax which would - 54,000 - - 1,62,000 3,15,000
have been payable
under section
115JA(1)
(9) Tax credit allowed 1,35,000 - 30,000 30,000 - -
under section
115JAA
(10) Carry forward of 1,35,000 - 30,000 30,000 - -
tax credit for set
off upto a
subsequent five-
year period
(11) Tax credit brought - 1,35,000 69,000 99,000 1,29,000 51,000
forward from
earlier year(s)
(12) Extent of the set off - 66,000 - - 78,000 51,000
of brought forward
tax credit
(13) Tax to be paid after - 54,000 - - 1,62,000 3,99,000
set off
(14) Tax credit to be 1,35,000 69,000 99,000 1,29,000 51,000 Nil
carried forward
after set off
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 W.P.(C) 5513/1997 Page 9 of 21 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 `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 `4,50,000/- which is computed as `1,35,000/- assuming the rate of tax to be 30%. In terms of Section 115JAA of the Act, the assessee would be eligible to set off the amount of tax paid on the deemed total income against tax payable in the succeeding 5 years.
10. In the second year, it is assumed that the income of assessee as computed under the provisions of the Act is `4,00,000/- and a sum of `1,20,000/- is payable as tax thereon. The adjusted book profits are assumed at `6,00,000/- and thus, in accordance with the provisions of Section 115JA of the Act, tax on `1,80,000/- which is deemed to be the total income of the assessee would be payable which amounts to `54,000/- as tax. Since, the tax payable under the normal provisions of the Act is higher than the tax as would have been payable on deemed total income under Section 115JA of the Act, the assessee would be liable to pay tax as per normal computational provisions of the Act and would also be entitled to claim credit on account of tax paid in the earlier year. The tax computed as per the normal provisions would be `1,20,000/-, the assessee would not be liable to pay this amount as he is entitled to claim a set off in respect of tax paid by him as per Section 115JA of the Act in the previous year. Although a credit of `1,35,000/- is available to the assessee, however, the set off allowed is limited to the extent that tax payable by an assessee does not fall below the minimum tax as payable under Section 115JA of the Act. As the tax under Section 115JA of the Act is computed at `54,000/-, the assessee can only claim a set off to the extent of `66,000/- being the difference between tax as computed under the normal W.P.(C) 5513/1997 Page 10 of 21 provisions and the tax as computed on the adjusted book profits as per Section 115JA of the Act.
11. Similarly, in the third year, since the tax on deemed income exceeds the tax as payable under the normal computational provisions of the Act, the assessee would be liable to pay the tax as computed on 30% of the adjusted book profits which is computed at `1,80,000/- as per the illustration. The assessee is permitted to carry forward the difference between the tax payable under normal computational provisions and the tax on adjusted book profits to be set off against the tax payable in the succeeding years. Thus, the assessee is liable to claim credit for a sum of `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 `1,35,000/- out of which only a credit of `66,000/- has been claimed in the second year and a credit of `69,000/- is still available, the assessee would now be entitled to claim a tax credit of `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 `1,35,000/- and as the unabsorbed credit available to the assessee on account of the tax paid in the previous years is `51,000/- the assessee would be entitled to claim a set off of the entire amount of `51,000/- and would be liable to pay a tax of `3,99,000/- instead of `4,50,000/- as computed under the normal provisions of the Act.
13. Section 115JA of the Act provides for an alternate method of calculating income to ensure that profitable companies pay tax at least on 30% of the profits W.P.(C) 5513/1997 Page 11 of 21 declared by them in cases where the taxable income as computed under the normal provisions of the Act is less than 30% of the disclosed book profits as adjusted in accordance with Section 115JA(2) of the Act. The concept of levying a minimum tax was introduced by the Finance Act, 1987 by introduction of section 115J in the Act. The language of section 115J(1) of the Act is similar to the language of section 115JA(1) of the Act. The object and purpose of introducing Section 115J can be easily understood from the Budget Speech of the then Finance Minister of India. The relevant extract of the speech is as under:-
"80. 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. In 1983, a new section 80VVA was inserted in the Act so that all profitable companies pay some tax. This does not seem to have helped and is being withdrawn. I now propose to introduce a provision whereby every company will to have to pay a "minimum corporate tax" on the profits declared by it in its own accounts. Under this new provision, a company will pay tax on at least 30% of its book profit. In other words, a domestic widely held company will pay tax of at least 15% of its book profit. This measure will yield a revenue gain of approximately Rs.75 crores."
14. Section 115J was in force from 01.04.1988 to 31.03.1991. After 01.04.1991, Section 115JA was inserted by the Finance (No.2) Act, 1996 w.e.f. 01.04.1997. The introduction of a minimum tax on profit making companies was considered necessary as certain companies were declaring high profits but not paying any taxes on account of deductions available under the normal computation provisions of the Act including set off of carried forward depreciation. In these circumstances, the Legislature thought it fit to enact a provision whereby taxable income of an assessee could be measured with reference to its book profits in certain cases where taxable income as calculated W.P.(C) 5513/1997 Page 12 of 21 under the normal provisions of the Act fell short of 30% of the declared book profits.
15. The Supreme Court while considering the applicability of Article 14 to fiscal legislations as in the case of ITO v. N. Takin Roy Rymbai: (1976) 103 ITR 82 has held as under:-
"While 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 violation of Article 14."
16. It is well settled that in matters of fiscal legislation, the legislature enjoys a greater degree of flexibility and discretion in respect of classification. A constitution bench of the Supreme Court in the case of Khandige Sham Bhat v. Agricultural Income Tax Officer: AIR 1963 SC 591, while observing that principles of Article 14 of the Constitution of India would be applicable to a tax legislation, clarified as under:
W.P.(C) 5513/1997 Page 13 of 21"But in the application of the principles, the Courts, in view of the inherent complexity of fiscal adjustment of diverse elements, permit a larger discretion to the Legislature in the matter of classification, so long it adheres to the fundamental principles underlying the said doctrine. The power of the Legislature to classify is of 'wide range and flexibility' so that it can adjust its system of taxation in all proper and reasonable ways".
17. A constitution bench of the Supreme Court in the case of Twyford Tea Co. Ltd v. State of Kerela: 1970 (1) SCC 189 while considering the question of application of Article 14 of the Constitution of India quoted with approval a passage from "Constitutional Law" by Willis and held as under:
"15. .......These principles have been stated earlier but are often ignored when the question of the application of Article 14 arises. One principle on which our Courts (as indeed the Supreme Court in the United States) have always acted, is no where better stated than by Willis in his "Constitutional Law" page 587. This is how he put it:
"A State does not have to tax everything in order to tax something. It is allowed to pick and choose districts. objects, persons, methods and even rates for taxation if it does so reasonably....The Supreme Court has been practical and has permitted a very wide latitude in classification for taxation."
This principle was approved by this Court in East Indian Tobacco Co. v. State of Andhra Pradesh: [1963] 1 SCR 404, at page 409. Applying it, the Court observed:
"If a State can validly pick and choose one commodity for taxation and that is not open to attack under Article 14, the same result must follow when the State picks out one category of goods and subjects it to taxation."
This indicates a wide range of selection and freedom in appraisal not only in the objects of taxation and the manner of taxation but also in the determination of the rate or rates applicable."
W.P.(C) 5513/1997 Page 14 of 2118. 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 which distinguished persons or things that are grouped together from others left out of the group and, (ii) that that differentia must have a rational relation to the object sought to be achieved by the statute in question. The classification may be founded on different bases, namely, geographical, or according to objects or occupations or the like. What is necessary is that there must be a nexus between the basis of classification and the object of the Act under consideration. It is also well established that Article 14 condemns discrimination not only by a substantive law but also by a law of procedure."
19. In the present case, the object of introducing Section 115JA of the Act was to ensure that all corporate assessees pay tax at least on 30% of the book profits declared by them. In this respect, section 115JA of the Act affected only those companies who declared large profits, however, as per the normal provisions of the Act, were liable to pay tax less than that as calculated on 30% of the declared W.P.(C) 5513/1997 Page 15 of 21 profits. Treating such 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, and thus, in our view the same is not unreasonable so as offend Article 14 of the Constitution of India.
20. As observed above, in fiscal enactments, the legislature has a very wide discretion in matters of classification so long as all persons falling in within that class are treated equally. Indisputably, no fault can be found with the provisions of Section 115JA of the Act on this account as the same is uniformly applicable to all companies where the total taxable income is less than 30% of the profits as declared by the profit and loss account drawn up in accordance with the Companies Act, 1956 and as adjusted as per explanation to section 115JA(2) of the Act. The net effect of Section 115JA of the Act is to limit the deductions on account of carry forward and set off losses, unabsorbed depreciation and other allowances which are permissible under the Act in respect of certain class of assessees. We do not find that this is in any manner arbitrary, unreasonable or violative of Article 14 of the Constitution of India
21. We may also note that a writ petition challenging the provisions of Section 115J of the Act as being unconstitutional was considered by this Court in the 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 W.P.(C) 5513/1997 Page 16 of 21 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 income other than agriculture income". Admittedly, Parliament has the legislative competence to enact any law for imposing a tax on income. Merely because Section 115JA of the Act provides for an alternate method of calculating taxable income which is different from the normal computation provisions under the Act cannot render the tax based on such computation to be without the authority of law.
23. The contention that tax as computed on the basis of book profits as provided under Section 115JA of the Act would fall outside the scope of tax as defined under Section 2(43) of the Act is also without any merit. Section 2(43) defines tax to, inter alia, mean "income tax chargeable under the provisions of this Act". Section 115JA of the Act only provides for a method for calculating total income of an assessee which is chargeable to tax. The tax as calculated on total income as computed on the basis of Section 115JA cannot be stated to be a levy outside the provisions of the Act.
24. The contention of the petitioner that book profits falls outside the definition of "income" under Section 2(24) of the Act and outside the definition of "total income" as defined under Section 2(45) of the Act is also without any basis. Section 115JA of the Act deems 30% of book profits of an assessee (as adjusted as per the explanation to section 115JA(2) of the Act) to be the total W.P.(C) 5513/1997 Page 17 of 21 income of an assessee chargeable to tax in certain cases. The expression "total income" as defined under section 2(45) of the Act means "the total amount of income referred to in section 5, computed in the manner as laid down in this Act". Section 115J of the Act provides an alternate method of computing income and such income as calculated is deemed to be the "total income" chargeable to tax. Thus, 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.
25. The Constitution Bench of the Supreme Court in the case of State of West Bengal v. Kesoram Industries Limited: [2004] 10 SCC 201 drew a distinction between measure or machinery employed for assessing tax and the nature of tax. The Court held that a measure of tax must not be confused with the nature of tax. In paragraph 33 of the majority judgment, the Court held as under:-
"33. We now proceed to enter a deeper dimension in 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 W.P.(C) 5513/1997 Page 18 of 21 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 of the nature of the tax, but it does not necessarily determine it. The nature of the mechanism by which the tax is to be assessed is not decisive of the essential characteristic of the particular tax charged, though it may throw light on the general character of the tax."
26. Further, while discussing an earlier decision in the case of 'Goodricke Group Ltd. v. State of West Bengal: 1995 Supp(1) SCC 707, in paragraph 126 of its judgment, the Court, inter alia, held as under:-
"126. .....
(ii) the subject of tax is different from the measure of the levy;
(iii) merely because a tax on land or building is imposed by reference to its income or yield, it does not cease to be a tax on land or building. The income or yield of the land/building is taken merely as a measure of the tax; it does not alter the nature or character of the levy. It still remains a tax on land or building. No one can say that a tax under a particular entry must be levied only in a particular manner. The legislature is free to adopt such method of levy as it chooses. So long as the essential character of levy is not departed from within the four corners of the particular entry, the manner of levying the tax would not have any vitiating effect;
xxxxx xxxxx xxxxx xxxxx xxxxx
(vi) it is permissible to classify land by reference to its user as a separate unit for the purpose of levy of cess. Tea estate, as a separate category of land, is a valid classification;
27. In paragraph 129 of its judgment, the Court further held that:
W.P.(C) 5513/1997 Page 19 of 21"(3) The nature of tax levied is different from the measure of tax.
While the subject of tax is clear and well defined, the amount of tax is capable of being measured in many ways for the purpose of quantification. Defining the subject of tax is a simple task; devising the measure of taxation is a far more complex exercise and therefore the legislature has to be given much more flexibility in the latter field. The mechanism and method chosen by the legislature for quantification of tax is not decisive of the nature of tax though it may constitute one relevant factor out of many for throwing light on determining the general character of tax."
28. The observations made by the Supreme Court in the case of State of West Bengal v. Kesoram Industries Limited (supra) are equally applicable to the facts of the present case as it is apparent that 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.
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 the assessee instead of W.P.(C) 5513/1997 Page 20 of 21 under the normal computation provisions of the Act. The fact that Section 115JAA of the Act provides for credit on account of tax paid against the tax payable for the subsequent years does not in any manner suggest that the levy on the basis of computation under Section 115JA of the Act is not a tax under the Act. The provisions of Section 115JAA of the Act are provisions for the benefit of an assessee and are intended to give certain credit in computation of the taxes payable by an assessee in respect of any tax paid by the assessee under Section 115JA of the Act. A set off in payment of income tax under Section 115JAA is only available subject to the assessee paying the minimum tax for each year as computed on the basis of Section 115JA. The credit can only be availed for a period of five succeeding years. This too does not in any manner indicate that the provisions of Section 115JA are unconstitutional or arbitrary. We have already held that the provisions of Section 115JA are not unconstitutional on a standalone basis and thus the challenge to section 115JAA, which provides for a scheme of granting remission of tax payable in certain cases, as being unconstitutional is devoid of any foundation.
31. In view of the above we hold that the provisions of Sections 115JA and 115JAA of the Act are neither arbitrary nor unreasonable and we are unable to accept the contention that the said provisions are ultra vires the Constitution of India. The present petition is accordingly, dismissed. The parties are left to bear their own costs.
VIBHU BAKHRU, J BADAR DURREZ AHMED, ACJ JULY 09, 2013 rk/MK W.P.(C) 5513/1997 Page 21 of 21