Income Tax Appellate Tribunal - Delhi
Vasundhara Lpg (P) Ltd. vs Income Tax Officer on 8 April, 2004
Equivalent citations: (2004)83TTJ(DELHI)860
ORDER
T.N. Chopra, A.M.
1. This appeal is filed by the assessee against the order of CIT(A), dt. 18th Aug., 2003 for asst. yr. 2001-02. The dispute arising in this appeal centers around interpretation of the provisions contained under Section 115JB particularly in the context of the facts of the present case.
2. Briefly stated, the facts are that the assessee is a private limited company engaged in the business of providing consultancy services. For asst. yr. 2001-02 assessee filed return of income on 16th Oct., 2001, declaring nil income. AO noticed that in the P&L a/c, a sum of Rs. 12,00,000 has been credited with the narration "provision for contingencies written back" and net profit has been worked out at Rs. 9,60,595. Regarding the amount of Rs. 12,00,000 written back in the books, the assessee stated that this comprises of two items each of Rs. 6,00,000 on account of salary of the director debited to the P&L a/c for asst. yrs. 1998-99 and 1999-2000, which has been written back since no such salary was payable due to losses of the company. AO further proceeded to invoke the provisions of Section 115JB and worked out a taxable income as under :
Book profit as declared Rs. 9,58,510 Less : Unabsorbed loss or unabsorbed depreciation whichever is less : Unabsorbed loss Rs. 8,00,459 Unabsorbed depreciation Rs. 16,765 Taxable income Rs. 9,41,545"
3. The contention of the assessee was that the amount of Rs. 12,00,000 is liable to be deducted while computing the book profit in view of Clause (i) of Explanation appended below Sub-section (2) of Section 115JB. AO, however, rejected the claim relying upon the decision of Supreme Court in the case of Apollo Tyres Ltd. v. CIT (2002) 255 ITR 273 (SC).
4. In appeal, the CIT(A) upheld the action of the AO on the ground that the AO does not have jurisdiction to go behind the net profit shown in the P&L a/c except to the extent as specifically provided under Explanation appended below Section 115JB(2).
5. Aggrieved with the order of CIT(A), assessee has come up in appeal before us.
6. Shri Ajay Vohra, learned counsel appearing on behalf of the assessee-company, argued that the adjustment made in the book profit is covered under Clause (i) of Explanation to Section 115JB. Learned counsel filed a paper book and invited our attention to the statement of accounts relating to preceding asst. yrs, 1998-99 and 1999-2000 and contended that since the assessee incurred losses, no salary was payable to the director Shri Malayaja Garga and provision of the salary made for each of the assessment years has therefore, been written back during asst. yr. 2001-02. Learned counsel invited our attention to the agreement entered into by the assessee-company with Shri Malayaja Garga, the director, wherein Clause 4 provided as under :
"That Mr. Garga shall be entitled to the remuneration @ 50,000 per month calculated from the date of this agreement. The remuneration for which Mr. Garga is entitled shall be deemed to have been accrued evenly on year to year basis however, the same will be due in the year in which the company earns profits and the remuneration shall be paid only out of the profits of the company. Therefore, the payment of remuneration to Mr. Garga shall be contingent upon the profitability of the company. The remuneration payable may be enhanced or reduced at any time by the mutual consent of the parties,"
7. Learned counsel submitted that accrual of salary to the director was conditional to earning of profits by the company in the respective assessment year. Shri Vohra next referred to p. 11 of the paper book showing P&L a/c for asst. yr. 1998-99 which indicate that the assessee has shown loss of Rs. 6,89,511. This loss has been arrived at after allowing salary of Rs. 6,00,000 to the director. At p. 10 of the paper book, balance sheet shows the liability with the narration of director's remuneration Rs. 6,00,000 for asst. yr. 1998-99. Assessee filed return showing loss of Rs. 6,92,020. However, while making the assessment, the salary of Rs. 6,00,000 has been added back on the ground that no such salary has been claimed before the AO by the assessee. Assessment order for asst. yr. 1998-99 is placed in the paper book at pp. 3 and 4. For asst. yr. 1999-2000, assessee filed the return showing loss of Rs. 7,89,523. Statement of total income shows loss of Rs. 7,89,523 is placed in the paper book at p. 15. For this year also, a sum of Rs. 6,00,000 has been debited to the P&L a/c on account of director's remuneration. Balance sheet of the assessee placed at p. 20 of the paper book for asst. yr. 1999-2000 shows on the liability side, "Director's remuneration payable" Rs. 12,00,000.
8. For asst. yr. 2001-02 which is the assessment year under appeal, the aforesaid liability of Rs. 12,00,000 has been written off (sic-back) by crediting the amount of Rs. 12,00,000 to the P&L a/c as already mentioned. In the backdrop of the aforesaid facts, contention of the learned counsel is that no salary was actually payable by the assessee-company in the asst. yrs. 1998-99 and 1999-2000 because of losses incurred by the company. He submitted that the amount of Rs. 6,00,000 for each assessment year has been merely provided by way of a provision which has been written back during asst. yr. 2001-02. Learned counsel referred to Clause (i) of Explanation which provides that book profit would be reduced by :
"the amount withdrawn from any reserves or provisions if any such amount is credited to the P&L a/c :
Provided that, where this section is applicable to an assessee in any previous year (including the relevant previous year), the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 2001 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"
9. According to the learned counsel, proviso as reproduced above is not applicable in the instant case, since the provisions made for asst. yrs. 1998-99 and 1999-2000 have been subsequently offered for assessment since these liabilities were contingent liabilities :
10. Learned Departmental Representative supporting the impugned order of the learned CIT(A) placed reliance on the decision of Supreme Court in Apollo Tyres Ltd.'s case (supra) and argued that the adjustment by way of deduction of Rs. 12,00,000 from the book profits is not covered under the Explanation inasmuch as accounts- have been prepared in accordance with the provisions of Parts n and III of Schedule VI to the Companies Act, 1956; According to her, the remuneration of Rs. 6,00,000 debited in the books for asst. yrs. 1998-99 and 1999-2000 each represented, ascertained and accrued liability of the assessee which has been debited to P&L a/c of the respective assessment year. Learned Departmental Representative specifically referred to p. 20 of the paper book which indicates that the liability of Rs. 12,00,000 outstanding in the balance sheet as on 31st March, 1999 was on account of director's remuneration payable. This liability according to her was not a provision and would, therefore, not be covered under the Explanation. She further referred to p. 22 of the paper book wherein as per Schedule I to the balance sheet for asst. yr. 1999-2000, serial No. 3 of the notes to the accounts refers to particulars of expenditure incurred on employees and expenditure of Rs. 6,00,000 has been shown as incurred on account of remuneration. Learned Departmental Representative further argued that liabilities debited in the books of the assessee and outstanding as on 31st March, 2001 would not be covered under Expln. (i) to Section 115JB.
11. After careful consideration of facts and circumstances of the case and going through the orders of the tax authorities below as well as the documents and material to which our attention has been invited by the parties, we have no hesitation in reversing the impugned order of the learned CIT(A). It appears to us that the entire approach and interpretation adopted by the learned CIT(A) is contrary to the very object and purpose of introducing the provisions of Section 115J, 115JA and 115JB in the IT Act, 1961. A new Chapter XII-B containing Section 115J has been inserted by the Finance Act, 1987 which levies minimum tax on book profits of certain companies. The scope and ambit of these provisions have been elaborated in para 36.1 of the Circular No. 495, dt. 22nd Sept., 1987 issued by the CBDT which reads as under :
"36.1 It is an accepted canon of taxation to levy tax on the basis of ability to pay. However, as a result of various tax concessions and incentives certain companies making huge profits and also declaring substantial dividends, have been managing their affairs in such a way as to avoid payment of income-tax."
12. We may further refer to the Budget speech of the then Finance Minister of India made in Parliament while introducing the Section 115J which reads as under :
"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 80WA 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 per cent of its book profit. In other words, a domestic widely held company will pay tax of at least 15 per cent of its book profit. This measure will yield a revenue gain of approximately Rs. 75 crores."
13. The object and purpose of introducing the concept of MAT (Minimum Alternate Tax) is manifestly clear from the aforesaid circular as well as the speech of the Finance Minister which shows that the IT authorities were unable to bring certain companies within the net of income-tax because these companies were adjusting their accounts in such a manner as to attract no tax or very little tax. It is with a view to bring such companies within the tax net that Section 115J was introduced in the IT Act with a deeming provision which makes a company liable to pay tax on atleast 30 per cent of its book profits as shown in its own account. In the backdrop of the aforesaid discussion, we feel that the present case before us clearly falls outside the conceptual framework of MAT enshrined in Chapter XII-B of IT Act, 1961 since, the assessee-company was running into commercial losses from year to year and such losses were not in any manner attributable to the claim of deduction of depreciation or other such incentives provided under the IT Act. This is not the case of a company which has earned substantial profits whereas while making the assessment, assessed income has been brought down substantially on the basis of claiming exemptions and incentives. We do not think that the assessee-company could possibly be characterised as a zero-tax company sought to be hit by levy of MAT under Chapter XII-B. It is an elementary principle of interpretation of statutes that statute should be given what has come to be known as purposive construction, i.e., the Court should identify the mischief which existed before passing of the statute and then proceeded to interpret the statute so as to suppress the mischief and advance the remedy. There is no doubting the view that subtle inventions and devices resorted to by any person for continuance of the mischief should be suppressed, However, the proposition cannot be extended beyond the intended purpose and object of the law makers and cause hardship, serious inconvenience, injustice and absurdity.
14. Having regard to the totality of the facts and circumstances of the case in hand, we have no hesitation in holding that the assessee is entitled to deduction of Rs. 12,00,000 for the purpose of computing book profit under Section 115JB.
15. We may briefly consider the factual matrix of the case. There is no denying the fact that the director was not entitled to any remuneration by virtue of Clause IV of the agreement with the company since the company was running into losses for asst. yrs. 1998-99 and 1999-2000. This factual position has been duly admitted by the assessee during assessment proceedings for asst. yrs. 1998-99 and 1999-2000. The AO has proceeded on the basis that no such liability has accrued for which deduction is to be allowed for the respective assessment year. For asst. yr. 1998-99, the amount of Rs. 6,00,000 on account of remuneration has been added back. For asst. yr, 1999-2000 even though the AO processed the return under Section 143(1)(a), the assessee has filed an application before the AO that deduction of Rs. 6,00,000 debited to the P&L a/c is not allowable since no such amount was liable to be paid to the director. We are not aware whether the AO has substantially carried out the rectification of the intimation or proceeded with the assessment under Section 143(3). Be that as it may, the fact remains that the amount of Rs. 12,00,000 reflected in the balance sheet as on 31st March, 1999 as director's remuneration payable was actually merely a provision and no such amount had fallen due because of losses incurred by the company from year to year. It is significant to note that for both the asst. yrs. 1998-99 and 1999-2000 if the debit of Rs. 6,00,000 on account of remuneration of the director is excluded from the P&L a/c, there is net loss for each of the two assessment years. This further supports the contention of the learned counsel that no remuneration was in fact payable to the director in any of the assessment years.
16. Learned Departmental Representative argued that entries in the books of accounts for asst. yrs. 1998-99, 1999-2000 as well as 2001-02 clearly indicate that the assessee had in fact incurred a liability of Rs. 6,00,000 for asst. yr. 1998-99 as well as 1999-2000. She says that entries made in the books do not reflect provision of any contingent amounts. Technically speaking this may be correct. However, merely because narration of entries has been made in a particular manner would not be determinative of the intrinsic nature and character of such entries. Had the entries in the balance sheet been made with a narration "provision for remuneration" instead of "remuneration payable" or "director's remuneration" the Department would have readily accepted, the contention of the assessee and allowed the deduction of Rs. 12,00,000 for the purposes of computing book profit under Section 115J. We are not persuaded to accept the stand of the Revenue which we feel is hyper-technical and clearly in conflict with the letter and spirit of the provisions contained under Section 115J. It needs to be stated here that Section 115J enacted a deeming fiction with a view to rope in the tax net zero-tax companies. Such deeming fiction would need to be construed liberally particularly keeping in view the object and purpose for which the fiction has been enacted by the legislature.
17. Learned Departmental Representative heavily relied upon the decision of Supreme Court in the case of Apollo Tyres Ltd. (supra). The said decision does not in our opinion support the case of the Revenue. In the said decision it has been held that the AO does not have the jurisdiction to go behind the net profits shown in the P&L a/c which have been prepared in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act. The Hon'ble Supreme Court has, in fact, delineated the limited scope of powers of the AO in tinkering with the book profit while applying the provisions of Section 115J. In the instant case, the case of the assessee is that remuneration has been provided for by way of creation of provision in asst. yrs. 1998-99 and 1999-2000 and such provision has been written back for the asst. yr. 2001-02, In case the Department treats the liability as an accrued liability, this would entirely be contrary to accounting principles, as well as legal provisions inasmuch as no such liabilities have arisen under the agreement entered into by the company with the director. The fact that no liability has accrued, has been accepted and admitted by the Revenue authorities while making the assessment for asst. yr. 1998-99. In the circumstances, we feel that the only rational and reasonable view which accords with equity and justice is that the assessee is entitled to deduction of Rs. 12,00,000 while computing book profit as per Section 115JB r/w Expln. (i). For these reasons, we reverse the finding of the learned CIT(A) and allow the appeal of the assessee.