Income Tax Appellate Tribunal - Pune
Smruthi Organics Ltd. vs Deputy Commissioner Of Income-Tax on 29 June, 2005
Equivalent citations: [2006]101ITD205(PUNE), [2007]290ITR172(PUNE), (2006)103TTJ(PUNE)546
JUDGMENT
K.G. Bonsal, Accountant Member
1. I.T.A Nos. 1268 to 1270/ PN/04 arise out of three orders of CIT(A)-III, Pune, passed on 7-6-2004. The corresponding orders of assessment were passed by the Dy. Commissioner of Income-Tax, Circle I, Solapur, on 30-1-2004 under the provisions of Section 143(3), read with Section 148 of the Income-tax Act, 1961. The assessee has taken identical grounds of appeal in all these three appeals. The appeals were also argued in a consolidated manner. Therefore, a consolidated order is passed. We may refer to the grounds of appeal taken up in the appeal filed for assessment year 1998-99.
2. The assessee has taken two grounds of appeal. First ground of appeal is against finding of the Id. CIT(A) that the assessments were validly re-opened under Section 147 of the Income-tax Act. The second ground of appeal is against the finding of the Id. CIT(A) that deduction under Explanation (viii) below Section 115JA of the Act has to be computed in accordance with provision of Section 80HHC and not on the basis of book profits. In the course of the hearing before us, the first ground of appeal was not pressed by the Id. Counsel of the assessee. Therefore, we are left with the issue of computation of deduction under Explanation (viii) only.
3. Controversy has been set out by the Id. CIT(A) in various sub-paragraphs of paragraph 3 of the impugned order. It is mentioned that the gross total income of the assessee was computed at a loss of Rs. 86,98,281. Therefore, in normal computation of income, the deduction under Section 80HHC was not claimed by it. However, while coming to computation of income under Section 115JA, the assessee deducted an amount of Rs. 2,91,725 from the book profits as deduction under Explanation (viii) and computed income at Rs. 1,24,139, being 30 per cent of the adjusted book profits of Rs. 4,13,796. The Assessing Officer was of the view that since gross total income of the assessee was a loss, it was not entitled to any deduction under Section 80HHC from the book profits. However, the case of the assessee was, it was entitled to the aforesaid deduction on book profits computed in the manner laid down in Sub-section (3), (3A), (4) and (4A) of Section 80HHC. The Id. CIT(A) considered various submissions made before him in this regard and came to the conclusion that the assessee was not entitled to any deduction under Section 80HHC from the book profits. Aggrieved by this order, the assessee is in appeal before us.
4.1 The Id. Counsel pointed out that the provisions of Section 115J as well as Section 115JA were brought on the statute book in order to force the companies, which had book profits and declared the dividends, to pay tax. Such companies came to be known as "zero-tax companies". The provisions of Section 115JA were inserted by Finance (No. 2) Act, 1996 with effect from 1-4-1997. Before that similar provisions existed on the statute books in the form of Section 115J regarding "Special provisions relating to certain companies." Those provisions remained in force for assessment years 1988-89 to 1990-91. The provisions of Section 115JA did not initially contain Clause (viii) of the Explanation below this section. This provision was inserted by Finance Act (1997) with effect from 1-4-1998. The intent and purpose of introducing this provision was to grant benefit to even zero tax companies of deduction under Section 80HHC. For the sake of convenience the provision contained in this clause of the Explanation may be reproduced here. It reads that the amount of profits eligible for deduction under Section 80HHC, computed under Clause (a), (b) or (c) of Sub-section (3) or Sub-section (3A), as a case may be of that section, and subject to the conditions specified in Sub-section (4) and (4A) of that section". The case of the Id. Counsel was that Section 115JA is code unto itself and it prescribes the method of computation of profits for the purpose of levy of what may be termed as minimum alternate tax (MAT). This section contains non obstante clause as it starts with the words "Not consisting anything contained in any other provisions of this Act...". It provides for an alternative method for computation of profits in case of a company-assessce whose total income computed under this Act is less than 30 per cent of its book profits. In such a case, the assessee-company will have to prepare its profit and loss account in accordance with provisions of Parts II, III of Schedule VI of the Companies Act, 1956. The book profits as computed in the profit and loss account shall be increased by the amounts referred to in Clauses (a) to (f) of the Explanation below this section. The amount so arrived at shall be reduced by the amounts mentioned in Clauses (i) to (ix) of the Explanation. The sum so arrived at shall be the book profit and 30 per cent thereof shall be deemed to be the total income of the assessee for the purpose of taxation. On the basis of these provisions, the ld, Counsel claimed that while computing deduction under Section 80HHC, and while giving effect to the provision contained in the aforesaid Clause (viii), the provisions of Sections 80A(2) and 80B(5) will have no application. In this connection, he referred to Circular Nos. 762 dated 18-12-1998,763 dated 18-2-1998 and 559 dated 4-5-1990. He also referred to the decision of ITAT Hyderabad Bench "B" in the case of Starchik Specialties Ltd v. Dy. CIT [2004] 90 ITD 34. In particular, our attention was drawn to paragraph 9 of this order, which deals with the controversy at hand. We will revert to the circulars and the decision shortly.
4.2 As against the arguments of the Id. Counsel, the Id. D.R. relied on the orders of the Assessing Officer and the Id. CIT(A). It was pointed out that under Sub-section (2) of Section 115JA, the book profits ascertained in accordance with Parts II and III of Schedule VI of Companies Act, 1956, had to be increased and decreased as stated earlier. In doing so, one has to examine whether the assessee is at all entitled to any deduction under the Clause (viii). He referred to the decision of Hon'ble Kerala High Court in the case of CIT v. Fertilizers and Chemicals Travancore Ltd. . On the basis of this decision, it was argued that the Assessing Officer has to examine first whether the assessee was at all entitled to deduction under Section 80HHC. The deduction will have to be worked out in accordance with the provisions contained in that section. If the assessee is not entitled to any deduction under that section, no such deduction can be made under Clause (viii) of the Explanation. In this case, the gross total income was a loss. Therefore, the assessee is not at all entitled to deduction under Section 80HHC and, therefore, no deduction can be allowed under Clause (viii) of the Explanation to the assessee.
4.3 In the rejoinder, the Id. Counsel of the assessee pointed out that reference to various Sub-section of Section 80HHC in Clause (viii) of the Explanation was only made to prescribe the formula for computation of deduction. However, the deduction had to be computed with reference to the book profits.
5.1 We have considered the facts of the case and rival submissions carefully. The Id. Counsel of the assessee had relied on Board Circular No. 762 dated 18-2-1998. In this Circular, it is, inter alia, mentioned that since MAT is applicable only where total income computed is less than 30 per cent of book profits, so long as the enterprises earning income from export profits do not have their components of export income higher than 70 per cent of book profits, the provision of Section 115JA will not be attracted. In another words, the MAT will apply only to such cases where export profits forming part of book profits of an assessee A exceeded 70 per cent of total profits. The Ld. counsel had also relied on Circular No. 763 dated 18-2-1995. In this circular, it is, inter alia, mentioned that MAT on companies was introduced with effect from 1-4-1997. For this purpose, 30 per cent of the book profits was deemed to be the income of the assessee. The Act exempts export profits that are eligible for deduction under Section 80HHC or under Section 80HHE from the purview of the MAT. It may be pointed out here that Clause (viii) of the Explanation was inserted with effect from 1-4-1998. Therefore, these circulars deal with the position of law before insertion of the aforesaid clause. The first circular does not really throw any light on the mode and manner of deduction under Clause (viii). It only says that MAT will apply only to such cases where export profits forming part of book profits exceeds 70 per cent of the total profits. The counsel's case seems to be that the circular speaks in terms of "Export Profits forming part of book profits" and therefore, deduction under the aforesaid clause should be based upon the book profits. Circular No. 763 merely states that Act exempts export profits that are eligible for deduction under Section 80HHC from the purview of MAT. It does not prescribe the method of computation of deduction under Clause (viii). It also does not speak of export profits as per books. Therefore, we are of the view that both these circulars do not prima facie advance the case of the assessee. The Id. Counsel also relied on Circular No. 559 dated 4-5-1990, which deals with exclusion of export profits from the purview of Section 115J. In this Circular, it is inter alia, pointed out that provisions of Section 115J took away the 100 per cent exemption which was to be allowed in respect of export profits earned by the exporters and thus, watered down the encouragement which was to be provided to such foreign exchange earning activities. Since the intention was that 100 per cent of such profits should be exempt, it was decided that profits, which are exempt under Section 80HHC should be excluded from the purview of the Section 115J. It may be pointed out that Clause (iii) was inserted under Explanation to Section 115J by Direct Tax Laws (Amendment) Act, 1989 with effect from 1-4-1989. This clause reads that - "the amounts as arrived at after increasing the net profits by amounts referred to in Clauses (a) to (f) and reducing the net profit by amounts referred to in Clauses (i) and (ii) attributable to the business, the profits of which are eligible for deduction under Section 80HHC or 80HHD; so, however, that such amounts are computed in the manner specified in Sub-section (3) or Sub-section (3A) of Section 80HHC or Sub-section (3) of Section 80HHD, as the case may be". This clause very clearly stated that the export profits will have to be deducted from the book profits and the amount to be deducted shall be computed in the manner specified in Section 80HHC. The language of this clause was very clear to the effect that the deduction shall be based upon the book profit and the mode and method of computation of income shall be in accordance with Sub-section (3) etc. of Section 80HHC. The aforesaid clause and the Board's Circular will become applicable to the case of the assessee only if the language of Clause (ii) in Section 115J is inpari materia with language of Clause (viii) in Section 115JA. The language of Clause (viii) has already been reproduced in paragraphs (4.1) and it will be seen that the languages of the two clauses are not in pan materia. The words used in Section 115JA are that amount of profits eligible for deduction under Section 80HHC, computed under Sub-section (3) etc. of that section. It does not use the language specifically to the effect that the deduction is to be computed in the manner specified in Sub-section (3) of Section 80HHC. Therefore, it does transpire that the languages of the two provisions are not in part materia.
5.2 The Id. Counsel of the assessee also relied on the decision of Hyderabad Bench 'B' in the case of Starchik Specialities Ltd. (supra). In paragraph 8 of this order, it is mentioned that the provision contained in Clause (iii) of Explanation to Section 115J was considered by the Hon'ble Kerala High Court in the case of G.T.N. Textiles Ltd. It was pointed out that what has to be reduced from the book profits is the amount of profit eligible under Section 80HHC, and that deduction has to be computed under Sub-section (3) or Sub-section (3A) of that section. The slight differences in expression like the words "in the manner" used in Clause (iii) and absence thereof in Clause (viii) of Section 115JA does not make any material difference. In the case decided by the Hon'ble Kerala High Court, assessee was engaged in manufacture of goods, most of which were exported out of India. Because of substantial amount of depreciation and investment allowance, the assessee did not have taxable income and, there-fore, the Assessing Officer made assessment under Section 115J. The assessee claimed deduction of export profit in computation of book profits as provided in Clause (iii) of Section 115J on the basis of book profits. The Hon'ble Court pointed out that the Tribunal was correct in holding that book profits are to be taken into consideration for the purpose of this deduction. The Hon'ble Tribunal relied on this decision to hold that computation on the same basis has to be made under Section 115JA also. It was further pointed out by Honourable Tribunal that both these sections levy MAT on zero tax companies. Taxes levied on the basis of book profits are subject to certain adjustments. These provisions come into operation when computation of income under normal provision is less than 30 per cent of the book profits. This requires - (i) determination of income under the normal provisions, and (ii) determination of book profits subject to some adjustments. These two sums are comparable to find out g what will be the basis of levy of tax. However, the provisions of Sections 80A(2) and Section 80B(5) are applicable to first procedure only. They do not come into the operation for computation of book profits under Section 115JA. We find that the Hon'ble Tribunal has held the provisions of Clause (iii) of Section 115J and Clause (viii) of Section 115JA are in pari materiaon the grounds, inter alia, that the second procedure stands independent of other provisions of the Act. We have already pointed out that there is some distinction in these two provisions.
5.3 The Id. DR relied on the decision of Hon'ble Kerala High Court in the case of Fertilizers & Chemicals Travancore Ltd. (supra). The main question before the Hon'ble High Court was whether on the facts and in the circumstances of the case, the Tribunal was right in holding that with reference to book profit as shown in profit and loss account of the company, the additions made by the Assessing Officer by way of disallowance of provision for foreseeable loss on contract, the provision for bad and doubtful debts and the provision for obsolescence, are not in accordance with provisions of Section 115J. It will be seen from the question that it is not of any relevance to the controversy at hand. However, the Hon'ble Court stated that As stated earlier, the amounts are added as per the provisions of the Act mentioned in Section 115J of the Act. Section 115J(1), Explanation (a), mentions only the amount of the income-tax paid or payable that does not include interest. According to us, the provisions in the Act have to be strictly construed. Insofar as interest on income-tax is not mentioned in the section, according to us, this cannot be added under Section 115J of the Act. The Id. D.R. placed emphasis on the observations of the Hon'ble High Court to the effect that the provisions of the Act very strictly construed. This case was decided under Section 115J and the provisions of this section are akin to provisions of Section 115JA. Therefore, it does appear that this observation will apply with equal force while interpreting the provisions of Section 115JA. In other words, the provisions of Section 115JA including provisions of Clause (viii) will have to be construed strictly.
5.4 Having considered all the aforesaid arguments, we are of the view that Hon'ble Hyderabad 'B' Bench placed somewhat liberal interpretations on aforesaid Clause (viii) of the section. Nonetheless, the Hon'ble members clearly held that deduction under Clause (viii) has to be computed with respect to the book profit. In spite of the difference in language of Section 115J and Section 115JA in the matter, pointed out earlier by us, we are of the view that judicial propriety demands that we follow the decision in the case of Starchik Specialities Ltd, (supra). In view thereof, it is held that deduction under Section 115JA, Clause (viii) of the Explanation, is to be computed on the basis of book profits.
5.5 The result of aforesaid discussion is that ground No. 1 of the appeal is dismissed as not pressed, and ground No. 2 of the appeal is allowed. Therefore, appeal Nos. 1268 to 1270/PN/04 are partly allowed.
ITA No. 1273/PN/04 (Assessment Year 2001-02)6. This appeal arises out of the order of CIT-III, Pune, passed on 2-6-2004, dismissing the appeal of the assessee, filed against the order of Dy. C.I.T., Circle 1, Solapur, under Section 154 of the Income-tax Act on 19-3-2004. The only ground of appeal taken up is that the Learned CIT(A) erred in upholding the order of the Assessing Officer passed under Section 154 of the Act rejecting the assessee's contention that for the purpose of calculating interest under Sections 234B and 234C, tax-credit allowed under Section 115JAA of the Act has to be set off and reduced from the amount of assessed tax in the context of Explanation 1 to Sub-section (1) of Section 234B of the Act.
7. The issue has been discussed by the ld. CIT (A) in paragraph 2.3 of the impugned order. He considered the provisions of Sections 115JA, 115JAA, 234B, 234C, 208 and 209 of the Income-tax Act. It was pointed out that MAT paid under Section 115JA cannot be considered on par with tax deduction at source, tax collection at source or advance tax. Therefore, the credit cannot be deducted from tax payable to arrive at the assessed tax, which has been defined in Explanation 1 of Section 234B. In view thereof, the contention of the appellant to reduce interest under Sections 234B and 234C was rejected.
8. Before us, the Id. Counsel relied on the decision of Chennai Tribunal, "C" Bench, in the case of Chemplast Sanmar Ltd. v. Dy. CIT [2004] 83 TTJ 427/3 SOT 620. In this case, it was inter alia, held that when an assessee is taxed under Section 115JA, then the difference between tax on book profits and the tax under normal computation is treated as MAT credit and retained by the Department. The tax credit is to be carried forward and in the year when the assessee is taxable under the normal computation of income-tax, carried forward tax credit is set off against the difference between the tax payable under normal computation and tax payable on book profits. If the tax liability increases or decreases on account of appeal etc., the amount of credit set off is also accordingly altered. However, the amount of unutilised credit is not to be re-paid. No interest is payable by the Department till the date of adjustment. In view of this, it was held in that case that the credit retained by the Department for the purpose of subsequent set off was in the nature of advance tax payment. The ld. counsel of the assessee also relied on the decision of IT AT, Cochin Bench, in the case of Synthetic Industrial Chemicals Ltd, v. Dy. CIT [2004] 90ITD 851. The Hon'ble Tribunal pointed out that a simple reading of provisions of law make it clear that the assessee has to first work out its advance tax liability on an estimate basis and thereafter reduce the tax deducted or collected at source and make arrangements for paying the balance amount in specified instalments. It can also be seen that the benefit of MAT is available to the assessee for the purpose of carry forward and set off any subsequent years. The liability to pay advance tax is linked with the liability for payment of assessed tax. It is only when the payment of advance tax is lesser than the specified limit, the question of non-payment of advance tax and the question of deferment of advance tax arise. Therefore, it was held that the MAT credit carried forward available to the assessee goes to reduce the assessed tax and thereby as a consequence, also reduces the liability towards payment of advance tax. It was also pointed that even though MAT credit is not specifically mentioned in Explanation to Section 234B, the credit has to be considered while quantifying the amount of advance tax payable by an assessee during the previous year.
9. As against the aforesaid argument of the Id. counsel of the assessee, the ld. DR pointed out that the instant appeal is not against the regular assessment order, but against an order under Section 154 of the Income-tax Act. The intent and purpose of his argument was that under such an order, only patent and apparent mistake of fact or law can be rectified and a mistake on which there could be two conceivable opinions cannot be rectified.
10. We have considered the facts of the case and rival submissions. We have also considered the decision of Hon'ble Tribunal in the case of Chemplast Sanmar Ltd. (supra) and Synthetic Industrial Chemicals Ltd. (supra). On combined reading of various Sections, namely, 115JA, 115JAA, 208, 209, 234B & 234C, the Hon'ble Tribunal came to the conclusion that MAT credit is akin to advance tax because it goes to reduce the liability of the assessee of the year and, accordingly, it reduces the liability of assessee by an equivalent amount from payment of advance tax. It has been mentioned by the Tribunal that MAT credit is not mentioned specifically in Explanation 1 to Section 234B. Therefore, it can be said that the issue whether MAT credit is advance tax paid or not is a debatable issue and any independent conclusion can be arrived at only after detailed arguments on the harmonious construction of aforesaid sections. Even after that, it cannot be said that MAT credit is tax deducted at source, tax collected at source or advance tax paid. Therefore, we are of the opinion that the question of law on this issue requires considerable debate. If the issue requires debate and discussion, it cannot become a subject-matter of rectification under Section 154 because under this section only patent and obvious mistake of law can be rectified. In view of this discussion, we arc of the considered view that the ld. CIT(A) was right in dismissing the appeals of assessee on the issue of computation of interest under Sections 234B and 234C.
11. The result of this discussion that the appeal of the assessee is dismissed.