Authority Tribunal
In Re: Rashtriya Ispat Nigam Ltd. vs Unknown on 19 July, 2006
RULINGS INCOME TAX A.A.R. No. 652 of 2004 Decided On: 19.07.2006 Appellants: In Re: Rashtriya Ispat Nigam Ltd. Vs. Respondent: Hon'ble Judges: Syed Shah Mohammed Quadri, J. (Chairman) and A.S. Narang, Member Counsels: For Appellant/Petitioner/Plaintiff: V. Ramachandran, Adv. For Department: Mahendra Singh, Adv. Subject: Company Acts/Rules/Orders: Income Tax Act, 1961 - Sections 32, 32(2), 32A(3), 72 to 74A, 74A(3), 80J(3), 115J, 115J(1), 115J(2), 115JB, 115JB(2), 115JB(3), 119, 135J(2) and 245Q(1); Companies Act, 1956 - Sections 205, 205(1) and 205(2); Companies (Amendment) Act, 1960; Income Tax Rules; Finance Act, 1987 - Section 43; Electricity Act Cases Referred: Surana Steels P. Ltd. v. Deputy CIT [1999] 237 ITR 777; Suryalatha Spinning Mills Ltd. v. Union of India [1997] 223 ITR 713; K.P. Varghese v. ITO [1981] 131 ITR 597 (SC), 612; Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706, 728; Baleshwar Bagarti v. Bhagirathi Dass [1908] ILR 35 Cal 701, 713; Desh Bandhu Gupta and Co. v. Delhi Stock Exchange Association Ltd. [1979] 4 SCC 565; National Thermal Power Corporation Ltd. v. Union of India [1991] 192 ITR 187, 188; CIT v. Mother India Refrigeration Industries P. Ltd. [1985] 155 ITR 711 (SC); CIT v. C.P. Sarathy Mudaliar [1972] 83 ITR 170, 173 (SC) JUDGMENT
A.S. Narang, Member
1. In this case an application Under Section 245Q(1) of the Income-tax Act, 1961, (hereinafter referred to as the "Act"), seeking advance ruling from the Authority has been filed on November 29, 2004. The applicant is a company registered under the Companies Act and being an undertaking of the Government of India, is a public sector company. The applicant was registered during 1982 (assessment year 1982-83) and it commenced its commercial operations during the previous year 1990-91 (assessment year 1991-92). During the previous years 1990-91 to 1993-94, 1998-99 and 1999-2000, the applicant had operational loss from business excluding depreciation, which could not be set off in the absence of profits. In respect of the years 1994-95 to 1997-98, 2000-01 and 2001-02, the applicant had operational profit.
2. Under Section 115JB, where in the case of an assessee being a company, the income-tax payable on the total income as computed under the "Act" in respect of any previous year relevant to the assessment year commencing on or after April 1, 2001, is less than 7Vi per cent, of the 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 at 71/2 per cent. Sub-section (2) of Section 115JB requires every assessee, for the purpose of the said section, to 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 subject to certain adjustments set out therein. The Explanation under Sub-section (2) defines "book profit" and requires the net profit shown in the profit and loss account as prepared under Sub-section (2) to be reduced by the amount of loss brought forward or unabsorbed depreciation whichever is less, amongst various other adjustments. The provisions of the Explanation shall continue to apply for the subsequent years so long as the amount of loss brought forward or unabsorbed depreciation does not become nil.
3. As at the end of the financial year 2001-02 (assessment year 2002-03), the applicant had business loss of Rs. 1,755 crores (approximately) and unabsorbed depreciation of Rs. 3,227 crores (approximately) eligible to be carried forward. During the financial year 2002-03 (assessment year 2003-04) the applicant had a net profit of Rs. 521 crores (approximately). In terms of Sub-section (2) of Section 115JB the net profit has to be reduced by the business loss or unabsorbed depreciation whichever is less and if the said adjustment is made there would be no book profit liable for assessment Under Section 115JB for the assessment year 2003-04.
4. For the financial year 2003-04 (assessment year 2004-05) the applicant reported a profit of Rs. 1,547 crores (approximately), During the said year, the total brought forward loss of Rs. 4,461 crores (approximately) shown in the profit and loss account by the applicant comprises of business loss of Rs. 1,755 crores (approximately) and unabsorbed depreciation of Rs. 2,706 crores (approximately), the profit of Rs. 521 crores (approximately) for the financial year 2002-03 (assessment year 2003-04) having been adjusted against the unabsorbed depreciation. It is stated by the applicant that, in terms of Sub-section (2) of Section 115JB the current year's profit has to be reduced by the business loss or unabsorbed depreciation, whichever is less and accordingly the book profit for the financial year 2003-04 (assessment year 2004-05) would be nil. The applicant, therefore, would not be liable to pay any advance tax for the assessment year 2004-05.
5. While this is so, the assessing authority (hereinafter referred to as the A.O.) called upon the applicant to make an ad hoc payment of around Rs. 60 crores towards estimated advance tax liability and with a view to cooperate with the Department the applicant paid Rs. 60 crores in March 2004, without prejudice to its claim that it is not liable for payment of minimum alternate tax for the assessment year 2004-05. The Assessing Officer proceeded on the basis that the profit of Rs. 521 crores (approximately) for the financial year 2002-03 (assessment year 2003-04) is adjusted against the business loss of Rs. 1,755 crores (approximately) leaving a balance business loss of Rs. 1,234 crores (approximately). The net profit of Rs. 1,547 crores (approximately) for the financial year 2003-04 (assessment year 2004-05) was reduced by the profit attributable to export turnover amounting to Rs. 233.45 crores arriving at the balance profit of Rs. 1,313.55 crores. This was further reduced by the brought forward business loss of Rs. 1,234 crores (being lesser than the unabsorbed depreciation of Rs. 3,227 crores) and the taxable income was arrived at Rs. 79.55 crores for the financial year 2003-04 (assessment year 2004-05). On the basis of the above working, the Assessing Officer concluded that the business loss to be carried forward was nil for computing the "book profit" for the financial year 2004-05 (assessment year 2005-06) and hence no deduction was called for on account of the unabsorbed depreciation. Accordingly the projected profit of Rs. 2,250 crores was adopted as the book profit for the financial year 2004-05 (assessment year 2005-06) for levy of minimum alternate tax.
6. On the facts stated above, the applicant has referred the following questions for ruling by the Authority :
(a) Whether, in a case to which Section 115JB applies, the applicant has the option to set off the current year's profit against the loss brought forward or unabsorbed depreciation, in its accounts, in a manner different from the manner adopted for determination of "book profit" Under Section 115JB ?
(b) Whether the applicant has discretion to set off the current year's profit, either against the loss brought forward or unabsorbed depreciation ? In the event of such set-off being made by the applicant in one year, can it in the subsequent years adopt a different method of set-off ? Can the applicant set off the current year's profit partly against the business loss brought forward and partly against unabsorbed depreciation in such proportion as it might decide ?
(c) Whether the applicant having disclosed the aggregate loss comprising loss brought forward and unabsorbed depreciation as a consolidated figure in its profit and loss account, can for the purpose of calculating the book profit Under Section 115JB bifurcate such consolidated loss into loss brought forward and unabsorbed depreciation and avail of the benefit of reduction envisaged under Sub-section (2) of Section 115JB in a manner most beneficial to it ?
(d) Whether it is open to the applicant to set off the current year's profit against the loss brought forward or unabsorbed depreciation in a manner most beneficial to it subject, however, to the provisions of Sub-section (2) and whether such adjustment can be changed from year to year ?
(e) Whether the applicant can change the method of setting off the current year's profit against loss brought forward or unabsorbed depreciation from year to year and whether that amounts to a change in the method of accounting and requires the approval of the assessing authority ?
(f) Which of the methods viz. the method adopted by the applicant for calculating the book profit for the assessment years 2004-05 and 2005-06 or the method adopted by the Revenue for the aforesaid assessment years is the correct method ?
7. The Commissioner in his comments has stated that the applicant claimed business loss/unabsorbed depreciation for the financial years 1990-91 to 2001-02 i.e., for 12 years amounting to Rs. 1,755 crores being cumulative business loss and Rs. 3,227 crores being unabsorbed depreciation. For the subsequent accounting years from 2002-03 to 2004-05 the applicant has shown net profit of Rs. 521 crores for 2002-03 and Rs. 1,547 crores for 2003-04 as per the audited accounts of the company, and estimated profit of Rs. 2,250 crores for the period 2004-05. The applicant is liable for payment of income-tax under the provisions of section 115JB for the accounting years 2003-04 and 2004-05, there being no dispute regarding computation of tax for the accounting years 2002-03, where the tax liability is nil. That the net profit of Rs. 521 crores for the year 2002-03 is required to be reduced by brought forward loss of Rs. 1,755 crores which is lesser than the aggregate unabsorbed depreciation of Rs. 3,227 crores. And accordingly the loss to be carried forward for the next accounting year would be Rs. 1,234 crores (1,755-521) and unabsorbed depreciation of Rs. 3,227 crores will remain unaltered. That the applicant while computing the minimum alternative tax (MAT) Under Section 115JB has followed the same method as adopted by the Revenue, however, for the purpose of carry forward of business loss/depreciation, the applicant has altogether changed the manner by setting off the current year's profit of Rs. 521 crores against unabsorbed depreciation of Rs. 3,227 crores in its books of account, instead of reducing the profit by accumulative business loss of Rs. 1,755 crores as done under the provisions of Section 115JB of the "Act". The applicant has, therefore, computed the carry forward of unabsorbed depreciation at Rs. 2,706 crores (3,227-521) and unabsorbed business loss at Rs. 1,755 crores. The same methodology has been adopted for the subsequent accounting year, i.e., net profit has been reduced by brought forward loss of earlier years for the purpose of MAT Under Section 115JB but for the purpose of carry forward to the subsequent year the same has been reduced by brought forward depreciation. That the applicant has chosen its own methodology of carry forward of book loss/book depreciation to either totally avoid or substantially reduce the MAT liability under the provisions of Section 115JB of the "Act" ; ignoring the Central Board of Direct Taxes Circular No. 495 (see [1987] 168 ITR (St.) 87, 110)para. 36 Under Section 115J illustrating year-wise carry forward and set off of book loss/depreciation and its set off against subsequent year's profit.
8. A comparative presentation of the MAT liability according to the Revenue and the applicant, would amply illustrate the contentious issue.
Computation of adjusted book profit under the provisions of Section 115JB(2) ______________________________________________________________________________________________ By the Revenue By the applicant ______________________________________________________________________________________________ Financial year 2002-03 (assessment year 2003-04) ______________________________________________________________________________________________ Rs. Rs.
______________________________________________________________________________________________ Book profits as per audited 521 cr. Book profit as per audited 521 cr.
accounts. accounts
As reduced by: As reduced by:
(i) Aggregate book loss for the (i) Aggregate book loss for
last 12 years the last 12 years
(-) Rs. 1,755 cr. (-) Rs. 1,755 cr.
or or
(ii) Aggregate unabsorbed (ii) Aggregate unabsorbed
dep. for the last 12 years as dep. for the last 12 years
per the books (-) Rs. 3,227 as per the books
cr. Rs. 3,227 cr.
Whichever is less 1,755 cr. Whichever is less 1,755
____________ ____________
Adjusted book profit (-) 1,234 cr. Adjusted book profit (-) 1,234 cr.
The adjusted book profit being negative,no However, for the subsequent year, the
tax liability arises under the MAT provision carry forward business loss/unabsorbed
for this year. However, for the next financial depreciation has been computed as year the applicant is entitled to carry under:
forward the following amounts :
(a) unabsorbed book loss = 1,234 cr. Book profit as per audited 521 cr.
accounts
(b) unabsorbed book dep. = 3,227 cr. Less: unabsorbed dep. 3,227 cr.
Balance unabsorbed dep. 2,706 cr.
Carry forward to the next f .y.
Balance unabsorbed book 1,755 cr.
loss carried forward to the
next f.y.
______________________________________________________________________________________________ Financial year 2003-04 (assessment year 2004-05) ______________________________________________________________________________________________ Book profit as per audited 1,547 cr. Book profit as per audited 1,547 cr.
accounts accounts
As reduced by: As reduced by:
(i) Brought forward unab- (i) Brought forward unab-
sorbed business dep. sorbed business dep.
(-) Rs. 3,227 cr. (-) Rs. 2,706 cr.
or or
(ii) unabsorbed loss (ii) unabsorbed loss
(-) Rs. 1,234 cr. (-) Rs. 1,755 cr.
Whichever is less 1,234 cr. Whichever is less 1,755 cr.
_________ ___________
Adjusted book profit 313 cr. Adjusted book profit as (-) 208 cr.
computed by the applicant
Less: Profit attributed to 233.45 cr. Since as per the applicant's method of
export turnover as computed calculation, the adjusted book profit is
by the applicant negative, there can be no levy of mini-
mum alternate tax for the f.y. 2003-04
__________
Balance adjusted book profit 79.55 cr. However, according to the applicant for
subject to levy of minimum next f. y. the following amounts are car-
alternative tax Under Section ried forward in the books :
115JB
As per the above computed for the purpose (a) Book profit as per 1,547 cr.
of Section 115JB(2) in respect of the next f.y. audited accounts
the applicant is entitled to carry forward the
following amounts :
Less : Brought forward 2,706 cr.
unabsorbed dep.
(a) Business dep. 3,227 cr. Balance unabsorbed dep. 1,159 cr.
carry forward to f. y.
2004-05
(b) Unabsorbed loss Nil (b) Unabsorbed loss car- 1,755 cr.
ried forward to the f. y.
2004-05
______________________________________________________________________________________________ Financial year 2004-05 (assessment year 2005-06) ______________________________________________________________________________________________ Estimated book profit as per 2,250 cr. Estimated book profit as 2,250 cr.
the applicant per the applicant
As reduced by: As reduced by:
(i) Brought forward unab- (i) unabsorbed business
sorbed loss as computed dep. (-) Rs. 1,159 cr.
for earlier yearRs. Nil
or or
(ii) Brought forward business (ii) unabsorbed loss
dep. as computed for ear- (-) Rs. 1,755 cr.
lier year (-) Rs. 3,227 cr. As computed by the
applicant for earlier f. y.
Whichever is less Nil Whichever is less 1,159 cr.
Adjusted book profit on which the applicant Adjusted book profit on which the MAT
is required to pay advance tax on account of liability arises is Rs. 1,091 cr.
MAT liability is Rs. 2,250 cr.
On such adjusted book profit, total advance On such adjusted book profit according
tax payable by the applicant would amount to the applicant, advance tax payable by
to Rs. 176.42 cr. the applicant would be Rs. 85.55 cr.
______________________________________________________________________________________________
9. The applicant in its rejoinder to the written submissions of the Commissioner has stated that while it is true that there is a disagreement between the applicant and the income-tax authority regarding the methodology to be adopted for computing the taxable income for the purpose of Section 115JB, the comments of the Commissioner that the method adopted by the applicant is intended to either totally avoid or substantially reduce the MAT liability is not correct. The applicant has adopted a method, which in its opinion represents the correct interpretation of Section 115JB. Section 115JB is self-contained and in so far as the method of computation adopted by the applicant is not at variance with the specific provision contained in the statute, the same cannot be rejected on the ground that it has no basis whatsoever. Neither the notes on clauses nor the memorandum explaining the objects of the subject provision indicate any particular method that should be followed in computing the taxable income. Hence, the applicant is bound only to adopt a methodology, which is based on the interpretation of the specific provision contained in the statute and not on any other basis. The applicant does not have any doubt as to the comparison between the amount of loss brought forward and unabsorbed depreciation and in reducing the lower of the two from the current year's net profit for ascertaining the book profit. The issue is only with reference to whether the current year's profit is to be adjusted against the loss brought forward or against the unabsorbed depreciation in the books of account of the applicant. The question for decision before the hon'ble Authority, it is submitted, is whether Section 115JB imposes any restriction with regard to the discretion of an assessee in the matter of computation of book profit, in the absence of any specification therein as to the manner in which business loss or unabsorbed depreciation has to be adjusted. In the absence of any statutory prohibition as regards the methodology adopted by the applicant, it cannot be termed as a design to reduce the tax liability. Courts have consistently held that so long as an assessee falls in line with the express statutory provisions, the transaction cannot be treated as a design, merely on the ground that the methodology results in a tax liability lower than what the Revenue seeks to levy. The methodology adopted by the Department is not based on any interpretation of the relevant statutory provisions by the honorable Income-tax Appellate Tribunal/ High Court/ Supreme Court. It is only based on an illustrative example given in Circular No. 495 dated September 22, 1987, (see [1987] 168 ITR (St.) 87), which was issued with reference to Section 115J while the taxable income of the applicant is required to be computed under the provisions of Section 115JB.
10. The main submissions of the applicant during the course of oral hearing 10 and subsequent written submissions dated March 11, 2006, received in the office of the Authority on March 16, 2006, are summarized as under :
11. The applicant prepares its accounts in conformity with the Companies Act, 1956. It shows only the consolidated figure of loss (including depreciation) in such accounts prepared. No bifurcation of such consolidated loss into book loss excluding depreciation and book depreciation is made separately, there being no such requirement as per the Companies Act.
12. For purposes of compliance with the provisions of Section 115JB of the Income-tax Act, the applicant bifurcates such consolidated loss shown in its accounts into book loss and book depreciation and claims the lesser of these two against its current profit. Such bifurcation is done only through a memorandum of adjusted statement prepared by the applicant for computation of its tax liability alone. Such bifurcation is not reflected in the annual accounts maintained under the Companies Act and hence has relevance for income-tax assessment only.
13. Each assessment year is an independent unit and presentation of accounts in one assessment year (for purposes of compliance with Section 115JB) will have no relevance to the presentation of accounts for the same purpose of Section 115JB in the subsequent assessment year.
14. The carry forward of its consolidated book loss (including depreciation), being governed by the Companies Act, the reduction of book loss or book depreciation, as the case may be, in its memorandum of adjusted statement filed in terms of Section 115JB are to be ignored. In the immediately following assessment year, the computation of income-tax liability Under Section 115JB must start with net profit as per the profit and loss account of that year which shows the consolidated figure of book loss (including depreciation) brought forward as per the Companies Act. No reference to the adjustments done in terms of Section 115JB in the preceding assessment year or years would, in the submission of the applicant, be required.
15. Based on the above reasoning, the applicant's contention is that, for the purposes of quantification of income-tax liability Under Section 115JB, although the reduction from the current year's profits to be made is the lesser of book depreciation or book loss brought forward from earlier years, yet for the purposes of quantification of carry forward of unabsorbed book loss and book depreciation to the next assessment year, the applicant company has the option to reduce from the current year's profit, either the book loss or the book depreciation, irrespective of which one is lower. It can exercise whichever option is beneficial to it.
16. The Revenue, on the other hand, has vehemently argued that if there is current profit as per the profit and loss account then the same would be reduced by either the book loss or the book depreciation, whichever happens to be less. Once such adjustment has been carried out, the unabsorbed book loss or the book depreciation brought forward, whichever had been the lesser, would stand further reduced by such adjustment. The reduced amount alone would be available for carry forward, to the subsequent year. The Department has relied on the Central Board of Direct Taxes Circular No. 495 dated September 22,1987 (see [1987] 168 ITR (St.) 87) to determine the correct method of set off and carry forward of book loss and book depreciation from one year to the next. The applicant has argued against its application on the ground that this circular cannot be construed as a total statement of law on the subject, but is only one of the interpretations. The Central Board of Direct Taxes circular is not binding on the applicant and it is open to the applicant to establish that a different interpretation is permissible under the law.
17. The contention of the applicant that the Companies Act does not contain any provision for bifurcation of loss is not tenable. Proviso (b) to Sub-section (1) of Section 205 of the Companies Act states as under :
Section 205(1) of Companies Act, 1956 :
205. Dividend to be paid only out of profits. (1)...
Provided that ....
(b) if the company has incurred any loss in any previous Hnandal year or years, which falls or fall after the commencement of the Companies (Amendment) Act, 1960, then, the amount of the loss or an amount which is equal to the amount provided for depreciation for that year or those years whichever is less, shall be set off against the profits of the company for the year for which dividend is proposed to be declared or paid or against the profits of the company for any previous financial year or years, arrived at in both cases after providing for depreciation in accordance with the provisions of Sub-section (2) or against both.
18. This clause is for the purpose of distribution of dividend by a company 13 which had earlier incurred losses, the company is required to reduce the current year's profit by the amount of loss or an amount which is equal to the amount provided for depreciation for that year or those years whichever is less. It is this very concept, which was incorporated in Section 115J of the Act under the Explanation, which states that for the purposes of Section 115J, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year and as reduced by clauses (i) to (iv). Sub-clause (iv) which is relevant is reproduced hereunder :
(iv) the amount of the loss or the amount of depreciation which would be required to be set off against the profit of the relevant previous year as if the provisions of clause (b) of the first proviso to Sub-section (1) of Section 205 of the Companies Act, 1956 (1 of 1956), are applicable.
19. Under Section 205 of the Companies Act this methodology was 14 prescribed so that the dividend distribution did not erode the capital of the concerned company and the concept was incorporated in Section 115J for the same purpose, i.e., the payment of MAT would not adversely affect the capital of the concerned company under this deeming provision. The applicant has strongly relied on the decision of the honorable Supreme Court in the case of Surana Steels P. Ltd. v. Deputy CIT , wherein it was held that the term "loss" in Section 205 of the Companies Act must be understood to mean loss after taking into account the depreciation. Subsequent to this decision of the honorable apex court the law was amended by introducing Section 115JA, which was in operation for the period April 1, 1997, to March 31, 2001. From the first day of April, 2001 onwards Section 115JB is operative. Under both these sections the relevant sub-clause (iii) pertaining to the amount of loss brought forward or unabsorbed depreciation includes an Explanation, which states that the loss shown shall not include depreciation. For the sake of convenience sub-clause (iii) is reproduced hereunder :
(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,
(a) the loss shall not include depreciation ;
(b) the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation, is nil.
20. The Explanation to sub-clause (iii) therefore leaves no room for doubt 15 that the expression "loss brought forward" does not include depreciation and the net profit of the current year is to be reduced by the lesser of the two and the provisions of sub-clause (iii) shall not apply if the amount of loss brought forward or unabsorbed depreciation is reduced to nil. In other words for the purpose of Section 115JB, the brought forward loss and unabsorbed depreciation are required to be depicted separately, independent of each other and after the current year's profit is reduced by the lesser of the two for the purpose of carry forward to the next year, the closing balance of the immediate preceding year would be the opening balance for the succeeding year. Since there is no direct decision on this specific issue this is to be examined according to the general principles of law and accountancy in the light of the particular facts of this case. The proposition that each year of accounting and assessment is an independent unit is tempered by the requirement for consistency and regularity of treatment, which is one of the primary foundations of law and accountancy. There can be several parallel streams of accounting, each of them independently following its own accounting and legal parameters prescribed by the respective statutes. The Companies Act prescribes rates of depreciation which are lower than those prescribed under the Income-tax Rules. For compliance with the Companies Act, the concerned companies are required to claim depreciation at the rates prescribed under the Companies Act. The closing written down value after such depreciation claim would become the opening written down value for the following year. The concerned company would not have any option in the matter. The written down value would be reflected year after year in conformity with the rates of depreciation claimed under the Companies Act. For all obligations under the Companies Act, it is such rates of depreciation and the resultant written down values, which would have to be taken cognizance. Under the Income-tax Act, the depreciation schedule would reflect the depreciation claim allowable as per the rates prescribed under the Income-tax Rules and the written down values year after year would be accordingly determined. Both these depreciation schedules, under the Companies Act and under the Income-tax Act, respectively, would run parallel, each undergoing change year after year as per its own prescribed rules with reference to the rate of depreciation allowable under the respective statutes.
21. Computation of tax liability in terms of the provisions of Section 115JB would be an example of another parallel stream. Computation of income (as affected by the rate of depreciation prescribed) would be quantified in a particular manner under the Companies Act for statutory obligations under the Companies Act, while there will be a parallel computation under the Income-tax Act (in terms of the depreciation rates prescribed by the Income-tax statute unaffected by the other. Section 115JB(3) gives statutory recognition to this general principle by stating that the carry forward of depreciation and loss under the general provisions of the Act (other than Section 115JB) will be governed by the relevant sections of the Act being Section 32 for depreciation and Section 72 for carry forward and set off of loss, etc. Thus the parallel streams of computation under the normal provisions of the Act and Section 115JB computation of tax liability are kept separate and independent of each other. Each stream, however, while being separate from the other parallel stream, is based on a continuity of treatment carried out year after year. The principles governing computation within a particular stream are strictly adhered to in every successive year. On the same principle, Section 115JB computation must follow the logic of internal consistency and regularity year after year, unaffected by the parallel computations running under the Companies Act and the normal provisions of the Income-tax Act. Reduction made to book loss or book depreciation in any particular year under the minimum alternate tax (MAT) provisions must form a necessary basis for computation of "MAT" liability for the subsequent year, irrespective of the treatment given under the Companies Act, or, for that matter, under the normal provisions of the Income-tax Act. The above interpretation is strongly supported by Circular No. 495 dated September 22, 1987 (see [1987] 168 ITR (St.) 87, 111. Para. 36.5 of the Circular, which is apposite, is extracted below :
36.5 The following examples illustrate as to how the amended provisions relating to the new section will be applied:
______________________________________________________________________________________________ New companies ______________________________________________________________________________________________ Book profits for the purposes of the Profit under the Companies Act, 1956 Income-tax Act ______________________________________________________________________________________________ (1) (2) ______________________________________________________________________________________________ Year 1984 Rs. Rs.
Loss excluding depreci- 3,00,000 Loss excluding deprecia- 80,000
ation tion
Depreciation 1,00,000 Depreciation 4,00,000
4,00,000
Year 1985
Profit before deprecia- 5,00,000 Profit before deprecia- 5,00,000
tion tion
Less : Depreciation 2,00,000 Less : Depreciation 4,00,000
__________ __________
as per books 3,00,000 1,00,000
______________________________________________________________________________________________ (1) (2) ______________________________________________________________________________________________ Less: deduction under 1,00,000 Less: business loss for 80,000 section 205(2) for the 1984 year 1984 _________ __________ 2,00,000 20,000 C.R Business loss 1984 3,00,000 Less: unabsorbed depre- 20,000 ciation Nil C.F. unabsorbed depre- 3,80,000 ciation 1985 ______________________________________________________________________________________________ (1) (2) ______________________________________________________________________________________________ Year 1986 Net loss as per books (-) 10,00,000 Business loss (-) 10,00,000 before depreciation Add: Depreciation 2,00,000 Add: depreciation as per (-)4,00,000 Income-tax Rules (-) Business loss to be car (-) 10,00,000 ried forward Unabsorbed deprecia (-) 2,00,000 tion to be carried forward Year 1987 Net profit 10,00,000 Profit before deprecia- 10,00,000 tion Book depreciation 2,00,000 Less : Depreciation as 8,00,000 per Income-tax Rules __________ Less: Carried forward 2,00,000 business loss for 1986 to 2,00,000 the extent adjusted Assessed income Nil Application of Section 115J Profit before depreciation 10,00,000 Less book depreciation 2,00,000 _________ 8,00,000 Less deduction Under Section 205(2) 2,00,000 _________ 6,00,000 Out of the amount whichever is less :
1984: Business loss 3,00,000
1986: Business loss 10,00,000
_________
Total loss 13,00,000
1986: Depreciation 2,00,000
Assessable income 30% of Rs. 6 lakhs, i.e, Rs. 1.8 lakhs. Amount to
be carried forward as per Sub-section (2) of Section 135J :
1984 : Unabsorbed depreciation 3,80,000
1986 : Business loss 8,00,000
Unabsorbed depreciation 4,00,000
______________________________________________________________________________________________ These amendments will come into force with effect from April 1, 1988, and will accordingly, apply in relation to the assessment year 1988-89 and subsequent years. [Section 43 of the Finance Act, 1987.]
22. The jurisdictional Andhra Pradesh High Court in Suryalatha Spinning Mills Ltd. v. Union of India in the course of disposing of the writ petitions filed against the constitutional validity of Section 115J, had occasion to discuss in detail this Circular No. 495. One of the conclusions reached by the court was that "... there was no illegality in the example of calculations given in the Board Circular No. 495, dated September 22, 1987, see [1987] 168 ITR (St.) 87))." The concept of contemporanea expositio is a well-established rule for interpreting a statute. The meaning of the Latin expression as per Black's Law Dictionary is "Contemporaneous exposition, or construction ; a construction drawn from the time when, and the circumstances under which, the subject-matter to be construed, as a statute or custom, originated". In this regard the observations of Justice P. N. Bhagwati of the hon'ble Supreme Court in the case of K.P. Varghese v. ITO are relevant to the issue. It was held as under :
These two circulars of the Central Board of Direct Taxes are, as we shall presently point out, binding on the tax department in administering or executing the provision enacted in Sub-section (2), but quite apart from their binding character, they are clearly in the nature of contemporanea expositio furnishing legitimate aid in the construction of Sub-section (2). The rule of construction by reference to contemporanea expositio is a well established rule for interpreting a statute by reference to the exposition it has received from contemporary authority, though it must give way where the language of the statute is plain and unambiguous. This rule has been succinctly and felicitously expressed in Crawford on Statutory Construction, 1940 Edn., where it is stated in paragraph 219 that 'administrative construction (i.e. contemporaneous construction placed by administrative or executive officers charged with executing a statute) generally should be clearly wrong before it is overturned ; such a construction, commonly referred to as practical construction, although non-controlling, is nevertheless entitled to considerable weight, it is highly persuasive'.
23. The honourable Supreme Court has reiterated the above principle in the case of Union of India v. Azadi Bachao Andolan 2003 263 ITR 706, 728 as under :
In K.P. Varghese v. ITO , it was pointed out by this court that not only are the circulars and instructions, issued by the Central Board of Direct Taxes in exercise of the power Under Section 119, binding on the authorities administering the tax department, but they are also clearly in the nature of contemporanea expositio furnishing legitimate aid to the construction of the Act.
The rule of contemporanea expositio is that 'administrative construction (i.e., contemporaneous construction placed by administrative or executive officers charged with executing a statute) generally should be clearly wrong before it is overturned ; such a construction, commonly referred to as practical construction, although non-controlling, is nevertheless entitled to considerable weight, it is highly persuasive' (Crawford on Statutory Construction, 1940 edition, as in supra note 130).
The validity of this principle was recognized in Baleshwar Bagarti v. Bhagirathi Dass [1908] ILR 35 Cal 701, 713, where the Calcutta High Court stated the rule in the following words :
it is a well-settled principle of interpretation that courts in construing a statute will give much weight to the interpretation put upon it at the time of its enactment and since, by those whose duty it has been to construe, execute and apply it.
The statement of this rule has also been quoted with approval by this court in Desh Bandhu Gupta and Co. v. Delhi Stock Exchange Association Ltd. .
24. During the course of oral hearing, learned counsel for the applicant contended that Circular No. 495 (see [1987] 168 ITR (St.) 87) having been issued Under Section 115J would not be applicable to the amended provisions as contained Under Section 115JB. It is not possible to uphold the contention for the simple reason that though the provisions for working out the "book profit" as contained in the Explanation have undergone little change, the basic provisions practically remain the same. In so far as from the net profit of the relevant previous year what is required to be reduced is only brought forward loss or unabsorbed depreciation, whichever is less as per the books of account.
25. The applicant's contention that Section 205(1) of the Companies Act read with the Supreme Court decision in Surana Steel's case makes it mandatory that the term "loss" in Section 205(1) of the Companies Act must be understood to mean loss after taking into account depreciation, is relevant only for the purpose of payment of dividend out of profits by a company. However, for the purpose of computing "book profit" Under Section 115JB(2), sub-clause (iii) of the Explanation to the second proviso specifically provides that, for the purposes of the sub-clause loss shall not include depreciation. A specific provision would therefore, overrule the general law, a well-established rule of interpretation, which needs no elaboration. Therefore, for purposes of compliance with the Companies Act, the term "loss" would be taken as after accounting for depreciation, while, in a computation Under Section 115JB of the Income-tax Act, the term "loss" would be taken as before accounting for depreciation. That the computation of income under different Acts can, and perhaps should, be different has already been dealt with. The important issue here is that a computation Under Section 115JB, as far as the figures of book loss or book depreciation brought forward from earlier year or years are concerned, must start with the figures of similar computation made Under Section 115JB in the immediately preceding year. Starting from any other point, as attempted by the applicant, would be against the principles of consistency and regularity. Section 115JB does stipulate that computation under the section should start from accounts prepared under the Companies Act for the relevant previous year, but that is only for the purpose of working out the net profit under Sub-section (2). Further, given the specific provisions of sub-clause (iii) of the Explanation the net profit so arrived at has to be reduced by the book loss or the book depreciation (whichever is less) of the preceding years as per accounts prepared under the Companies Act and as modified by the reduction, if any, made Under Section 115JB for earlier year or years. If the provisions of Section 115JB treat the book loss before depreciation and the depreciation claim itself as distinct, then the accounts prepared under the Companies Act must be modified, wherever necessary, to comply with the provisions of Section 115JB, for computation of minimum alternate tax.
26. In this regard the observations of Justice B. N. Kirpal of the Delhi High 21 Court (as his Lordship then was) in the case of National Thermal Power Corporation Ltd. v. Union of India are reproduced hereunder :
It was then contended that the petitioner has to maintain its accounts according to the provisions of the Electricity Act and it is not possible for it to comply with the provisions of Section 115J. We do not agree with this. Section 115J, as it stood in the year 1987-88, which is the only year applicable to the petitioner, does not make it mandatory for the accounts to be maintained under the provisions of the Companies Act. We see no difficulty in making adjustments in accounts wherever necessary for the purpose of complying with the provisions of Section 115J.
27. In view of the foregoing discussion, it is not possible to uphold the contention of the applicant that the presentation of accounts in one assessment year Under Section 115JB will have no relevance to the presentation of accounts in the immediate succeeding year for the same purpose Under Section 115JB. It, therefore, follows that the contention of the applicant that although the reduction to be made from the current year's profits is the lesser of book depreciation or book loss brought forward from earlier years, yet for the purposes of quantification of carry forward of unabsorbed book loss and book depreciation to the next assessment year, the applicant company has the option to reduce from the current year's profit, either the book loss or the book depreciation, irrespective of which one is lower is without any basis and cannot be approved.
28. By referring to the decision of the jurisdictional High Court in the case of Suryalatha Spinning Mills quoted supra it has been contended by counsel for the applicant that calculation Under Section 115JB does not amount to a method of accounting and accordingly leaves the applicant free to start the computation from the books of each previous year without reference to the manner in which the "book profit" was calculated in the immediate preceding year. We are unable to agree with the conclusion drawn since the observations of the Andhra Pradesh High Court, referred to by the applicant, only confirmed the position that the determination of taxable income under the provisions of the Act (other than Section 115J) and the right to carry forward and set off available Under Section 32 and Sections 72 to 74A remain unaffected by the computation made Under Section 115J. For the sake of facility the relevant portion of the decision (quoted by the applicant) is reproduced hereunder (page 722) :
Sub-section (2), with which we are concerned, says that the provisions of Sub-section (1) shall not affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under : (a) Sub-section (2) of Section 32; or (b) Sub-section (3) of Section 32A; or (c) clause (ii) of Sub-section (1) of Section 72 ; or (d) Section 73 ; or (e) Section 74 ; or (f) Sub-section (3) of Section 74A ; or (g) Sub-section (3) of Section 80J).
Sub-section (2) is only a saving provision. It provides that determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions, enumerated above, will have to be made unaffected by the provisions in Sub-section (1) of Section 115J.
It is argued that having regard to Sub-section (1), determination of the amounts to be carried forward of losses, etc., referred to above, three propositions are possible, viz.
(i) Once the income is determined under Sub-section (1) in an assessment year, from that year unabsorbed losses and unadjusted allowances, etc., mentioned above, cannot be carried forward any more because by operation of Sub-section (1) of Section 115J, a new scheme has come into effect which puts an end to the carrying forward of losses, etc.;
(ii) On the determination of the taxable income, under the relevant provisions of the Act, whatever amounts remain to be carried forward as per regular computation, either by way of unabsorbed losses or unadjusted allowances, etc., the same be carried forward to the next year ignoring the fact that a notional income is made taxable under Sub-section (1) ;
(iii) The taxable income arrived at under Sub-section (1) of Section 115J should be deemed as available for purposes of setting of unabsorbed losses or unadjusted allowances, etc., in that assessment year but postponed to the next year without allowing the actual adjustment.
In our considered view Sub-section (2) gives statutory recognition to the proposition (ii), and gives no scope to entertain propositions (i) and (iii).
29. Learned counsel for the applicant has also pleaded that Section 115JB has introduced a fiction of treating the "book profit" as total income in the case of specified companies. The fiction is to be construed strictly and nothing can be read into the statutory provision to extend the scope of the statutory fiction (CIT v. Mother India Refrigeration Industries P. Ltd. and CIT v. C.P. Sarathy Mudaliar ). Following the principle, as we do, we would add that where the statutory provision is silent regarding carry forward of business loss and unabsorbed depreciation after reduction against the current year's profit, the carry forward would be according to the general principles of law and accountancy as applicable for the purpose of carry forward of loss and unabsorbed depreciation under other Acts. It is not open to each taxpayer to opt for inconsistent method of accounting. Suffice it to say that no accounting is possible without following some "method of accounting" which is consistent and regular from year to year. Therefore, both on the interpretation of Section 115JB as well as on the principle of consistency of method of accounting, the claim of the applicant is untenable.
30. In the light of the above discussion we rule on the questions referred to above as under :
(a) No. The applicant does not have the option to reduce the current year's profit by the loss brought forward or unabsorbed depreciation (for the purpose of carry forward Under Section 115JB), in its accounts, in a manner different from the manner adopted for determination of "book profit" Under Section 115JB.
(b) No. The applicant does not have the discretion to reduce the current year's profit either by the loss brought forward or unabsorbed depreciation. The lesser of the two is required to be reduced from the current year's income. After making the reduction in one year, the applicant cannot adopt a different method in the subsequent years. The applicant cannot reduce the current year's profit partly by the business loss brought forward and partly by unabsorbed depreciation.
(c) No. The applicant having disclosed the aggregate loss comprising of loss brought forward and unabsorbed depreciation as a consolidated figure in its profit and loss account, for the purpose of calculating the book profit Under Section 115JB is required to bifurcate such consolidated loss into loss brought forward and unabsorbed depreciation but cannot avail of the benefit of reduction envisaged under Sub-section (2) of Section 115JB in a manner different from the one prescribed under the "Act", so as to be more beneficial to the applicant.
(d) No. It is not open to the applicant to reduce the current year's profit by the loss brought forward or unabsorbed depreciation in a manner more beneficial to the applicant and such adjustment cannot be changed from year to year.
(e) No. The applicant cannot change the method of reducing the current year's profit by the loss brought forward or unabsorbed depreciation from year to year. This would amount to change in the method of accounting (for the purposes of Section 115JB), which is not permissible.
(f) The method adopted by the applicant for calculating book profit for the assessment years 2004-05 and 2005-06 is not in accordance with Section 115JB and is, therefore, incorrect. The method adopted by the Revenue for the aforesaid assessment years is the correct method.