Gujarat High Court
Cairn vs Union on 21 October, 2010
Gujarat High Court Case Information System
Print
SCA/11581/2008 41/ 41 JUDGMENT
IN
THE HIGH COURT OF GUJARAT AT AHMEDABAD
SPECIAL
CIVIL APPLICATION No. 11581 of 2008
For
Approval and Signature:
HONOURABLE
MR.JUSTICE D.A.MEHTA
HONOURABLE
MS.JUSTICE H.N.DEVANI
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1
Whether
Reporters of Local Papers may be allowed to see the judgment ?
2
To
be referred to the Reporter or not ?
3
Whether
their Lordships wish to see the fair copy of the judgment ?
4
Whether
this case involves a substantial question of law as to the
interpretation of the constitution of India, 1950 or any order
made thereunder ?
5
Whether
it is to be circulated to the civil judge ?
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CAIRN
EXPLORATION (NO.7) LTD & 1 - Petitioner(s)
Versus
UNION
OF INDIA & 2 - Respondent(s)
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Appearance :
MR
C.J.AGARWAL, Senior Advocate with Mr.TUSHAR P HEMANI
for Petitioners
MR PS
CHAMPANERI for Respondents : 1,
MR MR BHATT, SR.ADVOCATE with MRS
MAUNA M BHATT for Respondents : 2 -
3.
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CORAM
:
HONOURABLE
MR.JUSTICE D.A.MEHTA
and
HONOURABLE
MS.JUSTICE H.N.DEVANI
Date
: /10/2010
CAV
JUDGMENT
(Per : HONOURABLE MS.JUSTICE H.N.DEVANI) This petition under Article 226 of the Constitution of India has been filed with the following substantive prayers:
"[17] The petitioner, therefore, prays that this Hon'ble Court be pleased to issue a writ of mandamus or a writ in the nature of mandamus or a writ of certiorari or a writ in the nature of certiorari or any other appropriate writ, direction or order and be pleased to:
[a] declare the provisions of clause (iii) of Explanation 1 of section 115JB of the Act as ultra vires the Constitution and liable to be struck down;
[b] restrain the Respondents from giving effect to the provisions of clause (iii) of Explanation 1 of section 115JB of the Act;
[c] issue writ of mandamus or an order directing the respondent No.2 & 3 to allow the reduction of the brought forward losses of Rs.11,67,85,411/- of the petitioner company from the net profit in order to compute the book profit under the MAT provisions (i.e. 115 JB of the Act) of the Income Tax Act, 1961 in the absence of any unabsorbed depreciation in respect of the assessment year 2008-2009;"
The facts as appearing in the petition are that the petitioner is a Private Company, limited by shares, incorporated in Scotland, U.K. under the Companies Act, 1985 and is a subsidiary of M/s Cairn India Holdings Ltd., a company registered in Jersey Channel Island. The petitioner No.1 Company is primarily engaged in the business of prospecting, drilling, exploring, producing and generally dealing in minerals, oils, gas and other related by-products. On 23.09.2005, the petitioner company, entered into a Production Sharing Contract (PSC) with the Government of India and, Oil & Natural Gas Corporation Ltd. (ONGC) for the exploration of natural resources. According to the PSC, the petitioner had a 49% participating interest in the contract area and, therefore, the petitioner company formed an Unincorporated Joint Venture (UJV) with other co-venturers to carry out the operations under the PSC. The petitioner company had no other business in India except the aforesaid participating interest in the UJV. For the financial year ending 31.3.2006, the petitioner company incurred expenditure of Rs.8,17,245/- on exploration, as its proportionate share in the UJV. According to the petitioner, the business of prospecting, drilling, exploring, producing and generally dealing in minerals, oils, gas and other related by-products is a capital intensive industry in initial years and, therefore, the companies of this industry, in accordance with Generally Accepted Accounting Principles (GAAP) reflect investments in oil well as expenditure incurred during the year in the financial statements. Therefore, the investments made before production of oil is though actually work-in-progress, but the same is claimed as expenditure for the year in accordance with Guidance Note issued by the Institute of Chartered Accountants of India on Accounting for Oil and Gas Producing Activities.
Accordingly, while preparing the profit and loss account for the financial year ending 31.3.2006, the petitioner company, out of the above exploration expenditure of Rs.8,17,245/- debited profit and loss account by a sum of Rs.7,33,264/- apart from operating expenses of Rs.75,000/-. Since there was interest income of Rs.1,509/-, the petitioner company, for the financial year ending 31.03.2006 relevant to assessment year 2006-07, incurred book loss of Rs.8,06,755/-, which was eligible for carry forward to the succeeding assessment year or years. Likewise for the financial year 2006-07 relevant to assessment year 2007-08, the petitioner company incurred expenditure on exploration of Rs.11,58,51,848/- and, operating expenses of Rs.1,26,808/-. The above aggregate expenditure of Rs.11,59,78,656/- was debited to the profit and loss account and, as there was no income, the entire loss incurred was, therefore, eligible to be carried forward to the succeeding assessment year or years. In other words, at the beginning of the financial year 2007-08 relevant to the assessment year 2008-09, the petitioner company had aggregate brought forward business loss of Rs.11,67,85,411/-, comprising of business loss of Rs.8,06,755/- for assessment year 2006-07 and, business loss of Rs.11,59,78,656/- for assessment year 2007-08.
The petitioner company had only brought forward business losses, but no unabsorbed depreciation owing to the peculiar fact that it never charged any depreciation in the past/current year since neither the petitioner nor the UJV owned any fixed assets. In fact, whenever any asset was needed for carrying out the business activities by the UJV, these were taken on hire basis by the UJV.
As a part of the corporate restructuring, the petitioner company in the financial year 2007-08 relevant to assessment year 2008-09, vide deed of assignment dated 23.3.2007, assigned its participating interest in the UJV to M/s Cairn India Limited, a group company, at exploration cost incurred till the effective date of assignment. According to the petitioner, as a result of the assignment, the petitioner company was only recouping the accumulated costs incurred on exploration activities. Up till the date of assignment, the petitioner company had incurred aggregate expenditure of Rs.16,17,33,783/- on exploration. The petitioner company on assignment of its participatory interest in the UJV to M/s Cairn India Ltd., recouped its entire cost of Rs.16,17,33,783/-, including the expenditure on exploration incurred in the financial year 2007-2008 of Rs.4,50,64,691/-. Accordingly, while preparing the profit and loss account for the financial year 2007-08 relevant to assessment year 2008-09 in accordance with Part II and III of Schedule VI to the Companies Act, 1956, the petitioner company disclosed the above recoupment of exploration cost of Rs.16,16,49,805/- as income, and further claimed expenditure incurred during the year of Rs.4,51,81,932/- being the expenditure on exploration of Rs.4,50,64,693/- incurred during the year and operating expenses of Rs.1,17,239/-. As a result of the above, there was net profit as per the profit and loss of Rs.11,64,67,873/- for the financial year 2007-08 relevant to the assessment year 2008-09. According to the petitioner, the aforesaid profit is not income, as the same is nothing but recoupment of costs incurred on exploration by the petitioner company in the preceding years. Such costs as incurred in the preceding years had been debited to the profit and loss account and brought forward as business loss for the assessment year 2008-09. The above assignment of participating interest did not result in any taxable income in the hands of the petitioner company under the normal provisions of the Act.
However, despite the fact that the above profit of Rs.11,64,67,873/- represented the recoupment of exploration cost incurred on assignment of participating interest, which had been also brought forward as business loss of Rs.11,65,85,112/-, on strict construction of statutory provisions contained section 115 JB of the Act there was a book profit, when as a matter of fact, there was no income. It is the case of the petitioner that as a result of assignment of the participatory interest at cost, there is mere artificial book profit, out of which no dividend under the Companies Act, 1956 could be declared or can be said to be available for the purpose of distribution of dividend.
Section 115JB of the Income Tax Act, 1961 (the Act) is a special provision for payment of tax by certain companies. Under the said provision, 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 the 1st day of April 2007, is less than ten per cent of its book profit, then notwithstanding anything contained in any other provision of the Act, 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 the amount of income tax at the rate of ten percent.
Sub-section (2) thereof provides that, every assessee, being a company, shall, for the purpose of the 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. The proviso thereto provides for the manner in which annual accounts are to be prepared.
Explanation 1 thereto provides that, for the purpose 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 clauses (a) to (f) thereof, if any amount referred to in clauses (a) to (f) thereof is debited to the profit and loss account, and as reduced by clause (i) to (vii) there of. Clause (iii) of the Explanation provides for reduction from the net profit of the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account. The explanation to clause (iii) provides that (a) the loss shall not include depreciation, and (b) the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation is nil.
According to the petitioner, on a strict and plain reading of the statutory provisions contained in section 115JB of the Act, it is evident that the petitioner company would be taxed on the whole amount of Rs.11,64,67,873/- which is profit as per the profit and loss account of the financial year 2007-08 relevant to assessment year 2008-09 since clause (iii) of the Explanation 1 to section 115JB of the Act read with Explanation (b) thereto, does not enable the petitioner to set off the brought forward business loss of Rs.11,65,85,112/-. It is the case of the petitioner that as the petitioner company had no unabsorbed depreciation in its books of account, but had only brought forward losses, the set off of brought forward loss is denied by the Legislature pursuant to the provisions of clause (iii) of Explanation 1 to section 115 JB of the Act, when in fact commercially speaking, there is no income for the assessment year 2008-09. That, under the provisions, as they have been enacted, it is apparent that, a set off of brought forward loss can be allowed only where there is unabsorbed depreciation, in absence thereof, despite the fact that there being no profit in the real sense, such companies have to suffer the tax burden, which is against the basic principles of taxation. It is the case of the petitioner company that there is no income in the case of the petitioner and as such, the levy of tax under section 115JB of the Act is ultra vires and therefore, unconstitutional.
It is in the aforesaid factual background that the petitioner has moved the present petition challenging the provisions of clause
(iii) of Explanation 1 to section 115 JB of the Act, as being ultra vires the Constitution and seeking a direction against the respondents No.2 and 3 to allow reduction of brought forward losses of Rs.11,67,85,411/- of the petitioner company from the net profit in order to compute the book profit under Minimum Alternate Tax provisions (115JB of the Act), in the absence of any unabsorbed depreciation in respect of the assessment year 2008-09.
Heard Mr. C. S. Agarwal, learned Senior Advocate with Mr. Tushar Hemani, learned advocate for the petitioner and Mr. M. R. Bhatt, learned Senior Advocate for the respondents.
Mr. Agarwal, learned Senior Advocate for the petitioner invited attention to the provisions of section 115JB of the Act, the historical background leading to the enactment of the said provision, as well as the objects and reasons for bringing the original enacted provision on the statute book. The learned Senior Advocate also invited attention to the budget speech of the then Finance Minister of India made in Parliament while introducing the said section to submit that the intention behind introducing the said provision was to tax highly profitable companies and no more.
It was submitted that clause (iii) of Explanation 1 to section 115JB of the Act read with clause (b) of the Explanation thereto are contrary to the purpose of the enactment of section 115JB of the Act, which provides for levy of Minimum Alternative Tax. It was further submitted that, the said provision was introduced to tax such companies which were having large profits and, were distributing dividends, without paying any tax, by claiming various deductions provided in the Act like depreciation, investment allowance and, other deductions as are contained in Chapter VIA of the Act. Hence, the intention of the legislature was to tax companies with large profits and not companies who did not have any profit. According to the learned counsel the provisions contained in clause (iii) of Explanation 1 to section 115JB of the Act are which provide for reduction from book profit (computed as per the Explanation below the main section) of loss brought forward or unabsorbed depreciation, which ever is less, and further, in case either of the two is absent no reduction is allowable, despite the fact that no depreciation is provided or can be provided and in fact, even not debited. In the circumstances, the said provision is discriminatory inasmuch as the same provides for distinction between an assessee who has taken plant and machinery on hire and, therefore has only unabsorbed business loss, and an assessee who has invested in acquisition of plant and machinery and therefore, has both unabsorbed business losses and unabsorbed depreciation. The provision also discriminates against companies that have incurred substantial expenditure on the capital assets eligible for depreciation under section 32(1) of the Act and, consequently, has huge unabsorbed depreciation but has no cash loss. Likewise, the provision discriminates against companies which have huge cash loss but little depreciation or no depreciation, since the business of the company may not be capital intensive, like service industry or a business where all expenditure including expenditure incurred on capital assets have been booked as revenue expenditure like business of oil exploration.
It was further submitted that Article 14 forbids class legislation but does not forbid reasonable classification. Reasonable classification must satisfy the two conditions, namely, (a) the classification must be founded on an intelligible differentia which distinguishes persons or things that are grouped together from other left out of the group, and (b) the differentia must have a rationale to the object sought to be achieved by the statute. According to the learned counsel, the provisions of clause (iii) of the Explanation to section 115JB are violative of Article 14 of the Constitution because by not allowing a reduction of loss, the legislature has not made a reasonable classification since assessees who may not be owing any asset are required to pay tax despite the fact that there is no income, which has no nexus to the object sought to be achieved by the legislation, that is, to tax dividend paying companies. In support of his submissions, the learned Senior Advocate for the petitioner has placed reliance upon the following decisions :
Peerless General Finance and Investment Co. Ltd. v. Union of India, (1987) 1 SCC 424, S.C. Prashar and Another v. Vasantsen Dwarkadas and others, (1963) 49 ITR 1 (SC), D.S. Nakara v. Union of India, [1983] 1 SCC 305.
Maneka Gandhi v. Union of India, [1978] 1 SCC 248.
S.K. Datta, ITO v. Lawrence Singh Ingty, 68 ITR 272 (SC).
Star Television News Ltd. v. Union of India, 317 ITR 76 (Bom).
Next it was urged that there is no rationale or valid basis to restrict the relief to unabsorbed depreciation or business loss, which ever is lower, particularly when the purpose of clause (iii) to the Explanation is to provide relief of losses of earlier years and not to deny relief of setting off of loss or unabsorbed depreciation, which ever is lower, even when there is no income to the petitioner company. It was reiterated that the intelligible differentia is absent in the provision denying the relief in a case where the amount of 'loss brought forward' or 'unabsorbed depreciation' is nil. According to the learned counsel, there may be service industries or trading concerns which may not have ownership of depreciable assets; thereby incurring no depreciation cost in their books. Unabsorbed depreciation in such cases would only be impossibility; but they may have normal business losses. Such companies may have the same quantum of loss (with nil depreciation) as other companies (with depreciation), but could be denied the setoff only due to operation of the explanation to clause (iii) of the Explanation to section 115JB of the Act. Thus, the provision creates discrimination between companies having the same quantum of losses.
Referring to the decision of the Supreme Court in the case of Garden Silk Weaving Factory Pvt. Ltd. v. CIT, 189 ITR 512, it was submitted that there is no distinction between unabsorbed depreciation and brought forward losses in the commercial sense, hence while computing the commercial book profit, the distinction vide clause (iii) of the Explanation to section 115JB is unfair and discriminatory.
It was further submitted that the tax levied goes beyond the intention of legislature, while enacting section 115J and section 115JA/115JB of the Act. In support of his submissions, the learned counsel placed reliance upon the decisions of the Supreme Court in the case of Surana Steels (P) Ltd. v. Commissioner of Income Tax, 237 ITR 777 (SC), and in the case of Apollo Tyres Ltd. v. Commissioner of Income Tax, 255 ITR 273 (SC), as well as the decision of the Bombay High Court in the case of Commissioner of Income Tax v. Ajanta Pharma Ltd., 318 ITR 252 (Bombay). It was further submitted that no reason emanates from the Finance Bill explaining the amendment and, therefore, the same is unconstitutional, as has been held in the case of Exide Industries Ltd., 292 ITR 470. Reliance was also placed upon the decision of the apex court in the case of Tata Motors Ltd. v. State of Maharashtra, AIR 2004 SC 3618 as well as the decision of the Madras High Court in the case of K. Jaya Prakash v. The Executive Authority, AIR 1982 Madras 272.
The next submission advanced on behalf of the petitioner was that where the plain literal interpretation of a statutory provision produces a discriminatory or incongruous or manifestly absurd or unjust result which could never have been intended by the Legislature, the Court may modify the language used by the Legislature or even "do some violence" to it, so as to achieve the obvious intention of the Legislature and produce a rational construction. It was submitted that it could never have been the intention of the Legislature to tax an assessee without being in receipt of any income. It was submitted that if the provisions of clause (iii) of Explanation 1 to section 115 JB of the Act are required to operate, the same would result into manifestly absurd or unjust result inasmuch as the assessee despite having no income, would be assessed to income merely for the reason that the assessee does not have any asset so as to claim depreciation. In support of his submissions, the learned counsel placed reliance upon the following decisions :
[a] K.P.Varghese v. I.T.O., [1981] 131 ITR 597 (SC).
[b] C.W.S. (India) Ltd. v. CIT, [1994] 208 ITR 649 (SC).
[c] Calcutta Gujarati Education Society v. Calcutta Municipal Corporation, [2003] 10 SCC 533.
[d] Commissioner of Income Tax v. J.H. Gotla, 156 ITR 323 (SC).
[e] Commissioner of Income Tax v. Hindustan Bulk Carriers, 259 ITR 449 (SC).
[f] Commissioner of Income-tax v. Ajanta Pharma Ltd., 318 ITR 252 (Bom.) It was further submitted that in the case of the petitioner, there are no profits, yet, on a strict construction of statutory provisions there are taxable profits, which is an absurdity and, therefore, not in accordance with the scheme and object of the Act. It was submitted that, in fact, as a result of assignment of the participatory interest at cost, there is mere artificial book profit, out of which no dividend under the Companies Act, 1956 could be declared nor was the said book profit available for the purpose of distribution of dividend. In the circumstances, having regard to the object of the enactment, section 115JB of the Act, to the extent it provides for levy of Minimum Alternative Tax without providing any safeguard, results into absurdity and is an arbitrary provision since a provision cannot require a tax payer to pay tax when really there is no profit, much less a book profit or income.
It was pointed out that in the light of the provisions of clause (iii) of the Explanation below section 115JB of the Act, if a company has no depreciable assets, no deduction can be allowed despite the fact that, there are huge carried forward losses. If a business of a company is not carried through or is based on capital intensive infrastructure, it will not be entitled to set off of loss suffered; whereas if it is based on capital asset oriented infrastructure, it would be entitled to set off, may be to the extent of depreciation allowable or brought forward loss, which every is lower. In the circumstances, the said provision is arbitrary inasmuch as the same treats the two assessees differently, which was not the object behind the enactment. It was contended that the right to freedom guaranteed under Article 19(1)(g) of the Constitution is also violated, as the impugned provision does not provide the right to practice trade or business by providing level playing field and denies a citizen who may suffer a loss to set off the same after carrying forward the same unless he has both a carried forward loss as well as a carried forward unabsorbed depreciation. If either of them is absent, he is denied the set off by disregarding the fact that such a citizen may not have any depreciable asset and, carries the same business without a depreciable asset. Thus, by denying such a citizen the right to set off loss also violates Article 19(1)(g) of the Constitution of India. In support of his submissions the learned counsel placed reliance upon the following decisions:
[a] The decision of the apex court in the case of State of Kerala v. Haji K. Haji Kutty Naha, AIR 1969 SC 378, was cited for the proposition that the validity of a taxing statute is open to attack on the ground that it infringes fundamental rights.
[b] The decision of the apex court in the case of Khandige Sham Bhatt v. Agricultural ITO, [1963] 48 ITR 21 (SC), was cited for the proposition that a State cannot make any law which takes away or abridges the equality clause contained in Article 14 of the Constitution which enjoins a State not to deny to any person equality before law or equal protection of law.
Next, it was submitted that no reason emanates from the Finance Bill explaining the amendment and, as such, the provision is unconstitutional. It was submitted that neither the objects and reasons nor does the affidavit in reply specify the intention behind introducing such a provision and as such, in absence of proper reasons being assigned for introducing the impugned provision, the same is unconstitutional and requires to be struck down.
In conclusion, it was submitted that the provisions of clause (iii) of Explanation 1 to section 115 JB of the Act are arbitrary, discriminatory and violative of petitioner's fundamental right under Articles 14 and 19(1) (g) of the Constitution and as such, ultra vires the Constitution and liable to be struck down. It was submitted that, in the alternative, if the Court is not inclined to strike down the said provision as being unconstitutional, the provision may be read down so as to achieve the obvious intention of the Legislature and produce a rational construction.
Mr. M. R. Bhatt learned Senior Advocate appearing on behalf of the respondents vehemently opposed the petition. It was submitted that Article 265 of the Constitution read with Entry 82 of the Union List contained in the Seventh Schedule to the Constitution empower the Union Government to levy tax on income other than agricultural income and it is by virtue of this provision and as a measure of equity in taxation that Minimum Alternate Tax (MAT) is levied under section 115JB of the Act on companies having book profits under the Companies Act. Such companies are required to prepare their profit and loss account in accordance with Part II and Part III of Schedule VI to the Companies Act and are liable to pay MAT on the "book profit" being the net profit shown in the profit and loss account as adjusted according to the provisions of Explanation 1 of section 115JB of the Act. Thus, MAT is essentially a tax on income and its levy is well within the legislative competence of the Union Government.
It was submitted that in the amended clause (iii), two limbs "(a)"
and "(b)" have been provided in the Explanation to clause (iii). While limb "(a)" which states that "the loss shall not include depreciation" already existed in the pre-amended provision, limb "(b)" was newly inserted providing that "the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation is Nil". Vide CBDT's Circular No.8 of 2002 dated 27.8.2002, it was also duly explained that the amendment in clause (iii) of the Explanation to section 115JB, clarifies that where the value of the amount of either loss brought forward or unabsorbed depreciation is "Nil", no amount on account of such loss brought forward or unabsorbed depreciation would be reduced from the book profit. It was contended that while the language of the provisions of clause (iii) of Explanation 1 to section 115 JB of the Act is by itself quite clear and unambiguous, the explanatory circular makes the application of the provisions absolutely clear. It was submitted that there was nothing unfair or discriminatory about the provisions of clause (iii) of Explanation 1 to section 115 JB of the Act and that, it is a well laid down judicial principle that having regard to the wide variety of diverse economic criteria that go into the formulation of fiscal policy, the legislature enjoys a wide latitude in the matter of selection of persons, subject matters, events etc. for taxation. The MAT provisions have basically been introduced as a measure of equity in taxation. The legislature does not have to tax everything in order to be able to tax something. If there is equality and uniformity within each group, the law would not be discriminatory. It was submitted that, in the facts of the present case, within each group, there is equality and uniformity insofar as the applicability of the impugned provision is concerned and as such, the same cannot be termed to be discriminatory.
Placing reliance upon a decision of the Supreme Court in the case of Jaipur Hosiery Mills (P) Ltd. v. State of Rajasthan, (1970) 26 STC 341, it was submitted that the statute is not open to attack on the mere ground that it taxes some persons or objects and not others, 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 of the Constitution. Referring to the decision of the Supreme Court in the case of State of A.P. v. McDowell and Co., (1996) 3 SCC 709, it was submitted that no enactment can be struck down on the ground that it is unreasonable or arbitrary and that, therefore, the petition deserves to be dismissed on this ground alone.
In rejoinder, the learned counsel for the petitioner submitted that the decision in the case of State of A.P. v. McDowell and Co., (supra) has no relevance to the issue involved in the present writ petition. It was contended that the Supreme Court, in the said case, has not held that an enactment cannot be struck down on the ground that it is arbitrary or unreasonable. It has held that Article 14 cannot be pressed into service merely on the allegation that the statutory provision was arbitrary or unreasonable, and that some constitutional infirmity has to be shown for striking down the legislation which, in the instant case, the petitioner, is contending. According to the learned counsel, the precise submission of the petitioner is that there is constitutional infirmity inasmuch as the provisions enacted are contrary to the intent and purpose of enactment of section 115JB of the Act and go beyond the scope and purpose of the said provisions and in fact, when read in context of object of enactment lead to absurd results and this deserves to be either struck down or must necessarily be read down. It was urged that it is more than evident that in the present case where the assessee who has not earned any income and has merely recouped the expenditure incurred in the preceding year is being held liable to pay tax, merely because in the preceding year expenditure had been incurred which had resulted into book loss and in the succeeding year, when there is such recoupment of expenditure, the same is to be treated to be a book profit so as to levy the Minimum Alternate Tax which is absolutely beyond the object and purpose of the enactment.
The principal and only challenge in the present petition is to the constitutional validity of clause (iii) of Explanation 1 of section 115JB of the Act on the ground that the same is discriminatory and arbitrary inasmuch as while computing the book profit the same provides for reduction from the net profit of loss brought forward or unabsorbed depreciation whichever is less, which means that if either of the two are absent the assessee would not be entitled to reduction in the book profit. Thus, the provision has been challenged as being discriminatory towards those assessees like the petitioner, who do not have capital asset based infrastructure and as such would not have any unabsorbed depreciation. Thus, despite having substantial brought forward loss, the petitioner in the light of the provisions of clause (iii) of the Explanation to section 115JB of the Act is still liable to pay tax on the book profit without the same being reduced by the amount of brought forward loss.
[7.1] It is in the background of the aforesaid facts that the petitioner has challenged the constitutional validity of the provisions of clause
(iii) of the Explanation to section 115 JB of the Act. Before adverting to the facts of the case as well as to the contentions advanced on behalf of the respective parties, it may be pertinent to take note of the legislative history as well as the relevant statutory provisions.
[7.2] A new Chapter XII-B, containing section 115J, came to be inserted by the Finance Act, 1987, with effect from 1st April, 1988. The new section made provision for levy of minimum tax on book profits of certain companies. Referring to the proposed section 115J, the Minister for Finance in the Budget Speech (Finance Bill, 1987), explained the rationale behind its introduction in the following words:
"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 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."
[7.3] In the Memorandum explaining provisions in Finance Bill, 1987 in relation to "New provisions to levy minimum tax on "Book profits" of certain companies", it has been stated thus:
"Under the existing provisions of the Income Tax Act, certain deductions are allowed in the computation of profits and gains of business or profession. Various deductions are also allowed under Chapter VI-A of the Income Tax Act in computing total income. As a result of these concessions, certain companies making huge profits, are managing their affairs in such a way as to avoid payment of income-tax.
With a view to making the tax system more progressive, a new Chapter XIIB is proposed to be inserted in the Income Tax Act.
Under the proposed amendment, in the case of any company whose total income as computed under the other provisions of the Income Tax Act in respect of any previous year is less than 30 per cent of its book profit, the total income of such taxpayer chargeable to tax shall be deemed to be the amount equal to 30 per cent of such book profit.
For the purposes of the aforesaid provisions, "book profit"
means the net profit as shown in the profit and loss account in the relevant previous year prepared in accordance with the provisions of Parts II and III of the Sixth Schedule to the Companies Act, 1956, subject to adjustments in respect of any amount of income tax paid or payable, any amount carried to any reserve set aside to meet any provision, or provision for loss of subsidiary companies or any amount set apart for declaration of dividends which are taken into the profit and loss account prepared in accordance with the Sixth Schedule as above.
However, the expenditure relating to income as well as the receipts relating to incomes to which the provisions of Chapter III of the Income Tax Act apply, will be excluded from the computation of the "book profit". Thirty per cent of such "book profit"
shall be treated as total income of the company to which the provisions of this new Chapter (section 115J) apply. It has also been provided that the aforesaid provisions shall not affect determination of the amount to be carried forward to the subsequent years under the provisions of section 32(2), 32A(3), 72, 73, 74, 74A and 80J relating to unabsorbed depreciation, unabsorbed investment allowance, unabsorbed loss and unabsorbed deduction relating to tax holiday.
As a consequential amendment, Chapter VIB of the Income Tax Act relating to restriction on certain deductions in the case of companies, is proposed to be omitted.
These amendments will take effect from 1st April 1988 and will, accordingly, apply in relation to the assessment year 1988-89 and subsequent years."
[7.4] The scope and effect of the provisions of section 115J had been elaborated in the departmental circular No.495 dated 22nd September, 1987. The portion of the said circular insofar as the same is relevant for the present purpose reads as under:
"[36.3] Section 115J, therefore, involves two processes. Firstly, an assessing authority has to determine the income of the company under the provisions of the Income Tax Act. Secondly, the book profit is to be worked out in accordance with the Explanation to section 115J(1) and it is to be seen whether the income determined under the first process is less than 30 per cent of the book profit. Section 115J would be invoked if the income determined under the first process is less than 30 per cent of the book profit. The Explanation to sub-section (1) of section 115J gives the definition of the "book profit" by incorporating the requirement of section 205 of the Companies Act in the computation of the book profit. Brought forward losses or unabsorbed depreciation whichever is less would be reduced in arriving at the book profits. Sub-section (2), however, provides that the application of this provision would not affect the carry forward of unabsorbed depreciation, unabsorbed investment allowance, business losses to the extent not set off, and deduction under section 80J, to the extent not set off as computed under the Income Tax Act."
[7.5] The present petition relates to Section 115JB of the Act, which came to be inserted by Finance Act, 2000 with effect from 1.4.2000, and insofar as the same is relevant for the present purpose reads thus:
115-JB.
Special provision for payment of tax by certain companies.--(1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income tax, payable on 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, 2007, is less than ten per cent of its 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 the amount of income tax at the rate of ten per cent.(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:
Provided that while preparing the annual accounts including profit and loss account,--
(i) the accounting policies;
(ii) the accounting standards adopted for preparing such accounts including profit and loss account;
(iii) the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of Section 210 of the Companies Act, 1956:
Provided further that where the company has adopted or adopts the financial year under the Companies Act, 1956, which is different from the previous year under this Act,--
(i) the accounting policies;
(ii) the accounting standards adopted for preparing such accounts including profit and loss account;
(iii) the method and rates adopted for calculating the depreciation, shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including profit and loss account for such financial year or part of such financial year falling within the relevant previous year.
Explanation-1.--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)xxxx to (h)xxxx if any amount referred to in clauses (a) to (h) is debited to the profit and loss account, and as reduced by xxxx
(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; or Explanation.--For the purposes of this clause, the loss shall not include depreciation; or xxxxx [7.6] Chapter XII-B came to be inserted in the Income Tax Act by the Finance Act, 1987 with effect from 1.4.1987. Under the provisions of the Income Tax Act, certain deductions are allowed in the computation of profits and gains of business or profession. Various other deductions are also allowed under Chapter VI-A of the Act in computing total income. As a result of these concessions, certain companies making huge profits were managing their affairs in such a way as to avoid payment of income-tax. In 1983, a new section 80VVA was inserted in the Act so that all profitable companies pay some tax, but the same does not appear to have helped. Hence, the same was withdrawn and Chapter XII-B came to be inserted introducing section 115J of the Act, a provision whereby every company would have to pay "minimum corporate tax" on the profits declared by it in its own accounts. As the number of zero tax companies and companies paying marginal tax had grown, Minimum Alternate Tax was levied from assessment year 1997-98 by virtue of the provisions of section 115JA which came to be inserted by the Finance Act, 1996 with effect from 1.4.1997. However, the efficacy of the said provisions had declined in view of the exclusions of various sectors from the operation of MAT and the credit system. It had also led to legal complications. Hence, in its place section 115JB came to be inserted by the Finance Act, 2000, with effect from 1.4.2001, which is simpler in application. The provisions of section 115JB as originally inserted provided that all companies having book profit under the Companies Act, prepared in accordance with Part-II and Part-III of Schedule-VI to the Companies Act, shall be liable to pay a minimum alternate tax at a lower rate of 7.5%, as against the then existing effective rate of 10.5% of the book profits. These provisions were made applicable to all corporate entities without any exception.
[7.7] Thus, section 115JB of the Act provides for a Minimum Alternate Tax (MAT) on companies. Under the provisions of this section, as applicable to the assessment year under consideration a company is required to pay at least 10% of its book profit as tax. In case the tax liability of a company under the regular provisions is more than this amount, the provisions of MAT will not apply and the company shall pay regular tax as per the regular scheme. Under the provisions of section 115JB of the Act, a deeming fiction has been introduced whereby in case where the tax payable by a company is less than 10% of its book profit, such book profit is deemed to be the total income of the assessee and the tax payable by the assessee on such income is the amount of income tax at the rate of 10%. Sub-section (2) of section 115JB of the Act provides for the manner in which the profit and loss account has to be prepared. The Explanation to section 115JB defines "book profit" to mean the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by clauses (a) to (g) thereunder. If any amount referred to in clauses (a) to (f) is debited to the profit and loss account, and as reduced by clauses (i) to (vii) thereunder. Clause (iii) of the Explanation to section 115JB of the Act provides for reducing the net profit as shown in the profit and loss account by the amount of loss brought forward or unabsorbed depreciation, whichever is less, as per the books of account. The explanation to clause (iii), inter alia, provides that the provisions of the said clause would not be applicable if the amount of loss brought forward or unabsorbed depreciation is `Nil'. In the circumstances, in the absence of either brought forward loss, or unabsorbed depreciation, an assessee would not be entitled to compute the book profit by reducing the net profit by the amount of brought forward loss or unabsorbed depreciation, as the case may be. Section 115JB of the Act opens with a non-obstante clause. From the scheme of the section as noted hereinabove, it is apparent that section 115JB is a self contained Code and will apply notwithstanding any of the provisions of the Act.
[7.8] In the facts of the present case, the petitioner does not have any unabsorbed depreciation as per its books of account and as such while computing its book profit, it is not entitled to the benefit of reduction of the net profit under clause (iii) of the Explanation to section 115JB. The petitioner has therefore, challenged the constitutional validity of the said provision contending that the policy behind the enactment is to tax zero-tax paying prosperous companies, whereas as a result of the operation of the impugned provision, which does not permit reduction of the net profit by brought forward loss in the absence of unabsorbed depreciation while computing the book profit, even a company like the petitioner who has no actual income in the year under consideration, is liable to pay tax at the specified rate on its book profit. According to the petitioner, the impugned provision insofar as the same provides for reduction of the book profit in case of companies having both brought forward loss and unabsorbed depreciation to the extent of the lesser of the two, is violative of Article 14 of the Constitution of India vis-à-vis those companies who have either only brought forward loss or unabsorbed depreciation. It is accordingly contended that the classification made by the legislature by virtue of the impugned provision which seeks to classify companies on the basis as to whether they have both carried forward loss as well as unabsorbed depreciation in their books of account or only either of the two, has no nexus to the object sought to be achieved, viz., to tax prosperous companies.
[7.9] In this regard it may be germane to refer to the decision of a Constitution Bench of the Supreme Court in S.K. Dutta, ITO v. Lawarence Singh Ingty, (1968) 68 ITR 271, wherein it was held thus:
"It is not in dispute that taxation laws must also pass the test of Article 14. That has been laid down by this Court in Moopil Nair v. State of Kerala, [1961] 3 S.C.R. 77. But as observed by this Court in East India Tobacco Co. v. State of Andhra Pradesh, [1963] 1 S.C.R. 404, 409, in deciding whether the taxation law is discriminatory or not, it is necessary to bear in mind that the State has a wide discretion in selecting persons or objects it will tax, and that a statute is not open to attack on the ground that it taxes some person or objects and not others; it is only when within the range of its selection, the law operates unequally, and that cannot be justified on the basis of any valid classification, that it would be violative of Article 14. It is well settled that 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."
[7.10] If one examines the impugned provision in the light of the principles enunciated in the aforesaid decision, it is apparent that all assessees falling within the ambit of section 115JB of the Act are special class of assessees, viz. those companies in whose case the income tax payable upon determining their total income under the provisions of the Income Tax Act is less than 10% of their book profit. While examining the constitutional validity of the impugned provision, what has to be seen is whether, within the class, there is any discrimination. On a plain reading of clause (iii) of the Explanation to section 115JB of the Act, it is apparent that the same applies uniformly and equally to all companies falling within the ambit of section 115JB, without any discrimination. The provision does not create any class within the class of assessees falling within the ambit of section 115JB. The fact that in a given case an assessee may not have any unabsorbed depreciation or any brought forward loss in its books of account, as a consequence of which the assessee would not be entitled to reduction of the book profit under the impugned provision, is a mere fortuitous circumstance. The legislature, while enacting a provision is not required to meet with or envisage every fortuitous circumstance that may arise while implementing such provision. Merely because in a given circumstance, the provision may act to the disadvantage of a particular assessee would not render the provision arbitrary, nor can it be said that the same violates the equality clause.
[7.11] In Government of A.P. v. Laxmi Devi, (2008) 4 SCC 720, the Supreme Court has analyzed and explained the power of judicial review of statutes. It has been held in the said decision that while the court has the power to declare a statute to be unconstitutional, it should exercise great restraint in this connection. In the opinion of the Court, there is one and only one ground for declaring an Act of the legislature (or a provision in the Act) to be invalid, and that is if it clearly violates some provision of the Constitution in so evident a manner as to leave no manner of doubt. It was further held that as regards fiscal or tax measures greater latitude is given to such statutes than to other statutes. All decisions in the economic and social spheres are essentially ad-hoc and experimental. Since economic matters are extremely complicated, this inevitably entails special treatment for special situations. The State must, therefore, be left with wide latitude in devising ways and means of fiscal or regulatory measures, and the court should not, unless compelled by the statute or by the Constitution, encroach into this field, or invalidate such law. As regards economic and other regulatory legislation, judicial restraint must be observed by the court and greater latitude must be given to the legislature while adjudging the constitutionality of the statute because the court does not consist of economic or administrative experts.
[7.12] The Court in the said decision was dealing with the provisions of the Stamp Act, 1899 (as in A.P.), and held that it is well settled that stamp duty is a tax, and hardship is not relevant in construing taxing statutes which are to be construed strictly. That there is no equity in a tax. If the words used in a taxing statute are clear, one cannot try to find out the intention and the object of the statute. The Court held that, the High Court, therefore, fell in error in trying to go by the supposed object and intendment of the Stamp Act, and by seeking to find out the hardship which will be caused to a party by the impugned amendment of 1998.
[7.13] In the case of State of A.P. v. Nallamilli Ramli Reddi, (2001) 7 SCC 708, the Supreme Court held, what Article 14 of the Constitution prohibits is "class legislation" and not "classification for purpose of legislation". If the legislature reasonably classifies persons for legislative purposes so as to bring them under a well-defined class, it is not open to challenge on the ground of denial of equal treatment that the law does not apply to other persons. The test of permissible classification is twofold: (i) that the classification must be founded on intelligible differentia which distinguishes persons grouped together from others who are left out of the group, and
(ii) that differentia must have a rational connection with the object sought to be achieved. Article 14 does not insist upon classification, which is scientifically perfect or logically complete. A classification would be justified unless it is patently arbitrary. If there is equality and uniformity in each group, the law will not become discriminatory, though due to some fortuitous circumstance arising out of peculiar situation some included in a class get an advantage over others so long as they are not singled out for special treatment.
[7.14] In the case of D. C. Bhatia v. Union of India, (1995) 1 SCC 104, the Supreme Court held that if there is some nexus between the object sought to be achieved and the classification, the legislature is presumed to have acted in proper exercise of its constitutional power. The classification in practice may result in some hardship. But, a statutory discrimination cannot be set aside, if there are facts on the basis of which this statutory discrimination can be justified. The Court can only consider whether the classification has been done on an understandable basis having regard to the object of the statute. The Court will not question its validity on the ground of lack of legislative wisdom. The classification cannot be done with mathematical precision. The Court cannot act as a super-legislature.
[7.15] In the facts of the present case, as noted hereinabove, the principal grievance ventilated is that the petitioner is put to undue hardship inasmuch as clause (iii) of the explanation to section 115JB of the Act does not permit reduction of book profit to the extent of brought forward loss, in case where a company does not have any unabsorbed depreciation as per its books of account. The constitutional validity of the said provision is also challenged on the ground of absurdity on the ground that though the petitioner does not have any income in the year under consideration, merely because the petitioner has shown book profit under the Companies Act, 1956, the petitioner becomes liable to pay tax under the provisions of section 115JB of the Act, without being in a position to set off the brought forward losses of the earlier years, which is absurd as the petitioner does not have any income in the year under consideration.
[7.16] The Income Tax Act, 1961 is indubitably a fiscal statute. The legislature has over the years been devising ways and means to prevent companies from avoiding total payment of income-tax by resorting to the various deductions and allowances made under the Act. In its attempt to bring all companies under the tax net, the legislature has formulated a scheme as contained under section 115JB of the Act with a view to ensure that all companies pay at least some tax. The provision also provides for the manner of computation of income thereunder, which is a special provision for certain companies. Section 115JB of the Act including clause (iii) of the Explanation thereto, which is impugned in the present petition applies uniformly to all companies. The said provision does not draw any distinction between companies as a class and applies to all companies which fall within its ambit; viz. companies in whose case the income tax payable on the total income as computed under the normal provisions of the Act in respect of the previous year relevant to the assessment year is less than 10% of their book profits. The provision does not intend to make any classification between a capital asset infrastructure company and a capital intensive company with no capital assets. If, as a consequence of implementing the provisions of the section, some companies are put to some hardship, it does not mean that the legislature has created a distinct class of companies. As held by the Apex Court in State of A.P. v. Nallamilli Ramli Reddi (supra), a classification would be justified unless it is patently arbitrary. If there is equality and uniformity in each group, the law will not become discriminatory; though due to some fortuitous circumstance arising out of peculiar situation some included in a class get an advantage over others so long as they are not singled out for special treatment.
[7.17] Under the Scheme of the Act, an assessee is entitled to carry forward its losses as well as unabsorbed depreciation and set off of the same in its regular assessment. It is only if after determining the total income of the company under the normal provisions, the income tax payable is less than 10% of its book profit that the income of such company is to be computed under section 115JB of the Act and the company becomes liable to pay tax at the rate of 10% of its book profit as computed under the provisions of section 115JB. The computation includes reduction of the book profit under clause
(iii) of the Explanation to section 115JB of the Act. Thus, it is not as if the assessee company is deprived of any right by virtue of the provisions of section 115JB of the Act.
[7.18] In the case of the petitioner company, the petitioner itself had debited the expenditure incurred by it to the profit and loss account and thereafter, had assigned its participating interest in the UJV to M/s Cairn India Ltd. before it actually started making any profit in relation to the business and as such, was not in a position to set off its losses against the income earned by it. In the year under consideration, it is an admitted position, that the petitioner had a book profit of Rs.11,64,67,873/- as per its books of account as maintained in accordance with provisions of the Companies Act, 1956 and as such, became liable to pay income tax in respect thereof under section 115JB of the Act. It is also not as if the petitioner was not permitted to set off its brought forward losses against its income. In fact it is only after computing the income under the provisions of the Income Tax Act after allowing all allowable deductions, because the income tax payable works out to less than ten per cent of book profits that the petitioner has become liable to be assessed under provisions of section 115JB of the Act on its book profits. Thus, merely because, in the peculiar facts and circumstances of the case of the petitioner, the petitioner has not been able to set off its losses against its income while computing its income under section 115JB of the Act, the same would not render the statutory provisions unconstitutional or invalid. In the circumstances, the challenge to the provisions of section 115JB of the Act must necessarily fail.
[7.19] Though not specifically pleaded in the petition, at the time of hearing of the petition it had been urged that in case where the plain literal interpretation produces an absurd or manifestly unjust result which could never have been intended by the Legislature, the Court may fine tune the language used by the Legislature and produce a rational result. It was submitted that since the plain and literal interpretation produces an absurd and unjust result inasmuch as the petitioner who has no income is required to pay tax, the provision is required to be read down by the Court.
[7.20] Insofar the prayer that the provisions may be read down is concerned, it is well settled that the Doctrine of Reading Down is an internal aid to construe the words or phrase in a statute to give it a reasonable meaning. The object of reading down is to keep the operation of the statute within the purpose of the Act and constitutionally valid. Thus, in order to save a statute or a part thereof from being struck down it can be suitably read down. However, reading down is not permissible in such a manner as would fly in the face of the express terms of the statutory provisions. It is a very well settled legal position, that if the Court while construing a provision, finds that the same is ambiguous, the Court instead of striking it down, may read it down so as to save the constitutional validity. Moreover, the rule of reading down applies only where two views are possible as to the meaning of the statutory language. (See Delhi Transport Corporation v. D.T.C. Mazdoor Congress, 1991 Supp (1) SCC 600, C.B. Gautam v. Union of India , (1993) 1 SCC 78, and Rapti Commission Agency v. State of U.P., (2006) 6 SCC 522).
[7.21] In the present case, the Court does not find the impugned provision to be in any manner unconstitutional, hence, the question of reading it down to save its constitutional validity does not arise. Besides, the provisions of clause (iii) of the Explanation to section 115JB are clear and ambiguous and it is not possible to take two views as to the meaning of the statutory language. Hence, the request to read down the provision also does not merit acceptance. Consequently, the question of directing the respondents to allow reduction of the brought forward losses of Rs.11,67,85,411/- of the petitioner company from the net profit in order to compute book profits under section 115JB of the Act in absence of any unabsorbed depreciation in the assessment year under consideration, also cannot be accepted.
For the foregoing reasons, the Court does not find any merit in the petition. The petition, therefore, fails and is accordingly, rejected. Notice is discharged. No order as to costs.
[D.A.MEHTA, J.] [HARSHA DEVANI, J.] parmar* Top