Income Tax Appellate Tribunal - Cochin
Escapade Resorts (P) Ltd. vs Assistant Commissioner Of Income Tax on 25 August, 2006
Equivalent citations: [2008]303ITR118(COCH), (2007)107TTJ(COCH)871
ORDER
Riyaz S. Padvekar, J.M.
1. In this group of appeals of the same assessee, four appeals are preferred by the assessee which relate to the asst. yrs. 1997-98, 1998-99, 1999-2000 and 2001-02 and one appeal is preferred by the Revenue relating to the asst. yr. 1997-98. Since most of the issues are common in these appeals, these appeals were heard together and are now being disposed of by this common order for the sake of convenience.
2. The first common issue in all appeals of the assessee is with regard to levy of interest under Section 234B and under Section 234C of the IT Act, 1961, when the tax liability arises under the provisions of Section 115JA of the Act. The assessee is a closely held company which is engaged in the business of hotel. In all the years under consideration, the assessee company filed its returns of income declaring the total income as computed under the provisions of Section 115JA of the Act. The assessee had also paid advance tax. For the purpose of assessment, the assessee's income was determined for all the assessment years under Section 15JA of the Act. For the asst. yrs. 1997-98, 1998-99, 1999-2000 and 2001-02, the returns filed by the assessee were processed under Section 143(1)(a) of the Act. While doing so, the AO charged interest under Section 234B and under Section 234C for the asst. yr. 1999-2000 and under Section 234C for the asst. yrs. 1997-98, 1998-99 and 2001-02.
3. The assessee challenged the charging of interest while processing the returns under Section 143(1)(a) by the AO before the CIT(A). As far as the asst. yr. 1997-98 is concerned, the CIT(A) allowed the appeal filed by the assessee on the finding that as the issue in respect of charging of interest under Section 234C is debatable in nature, hence while doing the ptima facie adjustment, the same cannot be levied and he directed the AO to delete the interest charged under Section 234C of the Act. Against the order of the CIT(A), the Revenue is in appeal before us. As far as asst. yrs. 1998-99, 1999-2000 and 2001-02 are concerned, the contention of the assessee was not accepted by the CIT(A) and hence, the assessee is in appeal before us for those assessment years. As far as ITA No. 452/Coch/2002 is concerned, it relates to the asst. yr. 1997-98 which is preferred by the assessee and in this particular appeal, the assessment under Section 143(3) is under challenge. In this year also, the AO has charged interest under Sections 234B and 234C of the Act. The assessee has challenged the charging of interest under Section 234B and under Section 234C of the Act by the AO on the contention that in all these assessment years, the assessee's total income is determined on the book profit computed under Section 115JA of the Act.
4. We have heard the senior counsel, Shri G. Sarangan, along with Shri P.K. Sasidharan, chartered accountant, for the assessee and the learned Departmental Representative, Smt. Beena Sarasan, for the Revenue. The learned senior counsel submitted that as far as Section 115JA is concerned, it is in the nature of a deeming provision and that is not the true income which is contemplated under the charging provision of the IT Act. Section 115JA is having an overriding effect and total income of the assessee is determined on the basis of the book profit which is computed under Parts III and IV of Sch. VI to the Companies Act, 1956. It was further argued that Section 115JA has been brought on the statute book by the Finance Act, 1996, which was made applicable from the asst. yr. 1997-98. He further submitted that earlier upto asst. yr. 1990-91, Section 115J was in operation and income in the case of a company was determined on the basis of the book profit computed under the provisions of Section 115J. It was further argued that Section 115JA is pah mateiia to Section 115J and there is not much diflerence in both the sections. It was further argued that this particular legal position has been settled by the interpretation to newly inserted Section 115JA by the Hon'ble High Court of Kerala in the case of C1T v. Apollo Tyres Ltd. . It was further contended that the decision in respect of Section 115J is also applicable to Section 115JA. The earned Counsel for the assessee further submitted that the payment of advance tax is contemplated in case of income computed in the regular provisions of the IT Act and not under the deeming provisions. It was further contended that when the total income of the assessee is determined by invoking Section 115J based on the book profit, then whether the charging provisions of Sections 234B and 234C are applicable or not has come for judicial scrutiny before the Hon'ble Karnataka High Court in the case of Kwality Biscuits v. CIT and in that case, after thoroughly examining the scheme of Section 115J and also the provisions of Sections 234B and 234C, the Hon'ble Karnataka High Court held that when the income is determined under Section 115J of the Act and tax is levied on that, no interest can be levied in such case under Sections 234B and 234C of the Act. The earned Counsel further submitted that this particular issue regarding the applicability of Sections 234B and 234C in cases where the tax is determined on the total income computed by invoking Section 115J was in controversy, but now, that issue has been settled by the decision of the Hon'ble Supreme Court as the Hon'ble Supreme Court dismissed the appeal filed by the Revenue which is reported in CIT v. Kwality Biscuits (2006) 205 CTR (SC) 122 : (2006) 284 ITR 434 (SC). ft was further argued that the ratio in the case of Kwality Biscuits Ltd. (supra) as laid down by the Hon'ble High Court of Karnataka, has been approved and hence, as per the settled legal principles of law, the law declared by the Hon'ble Supreme Court was the law always in existence and it has got a retrospective effect. He, therefore, submitted that now, on merits, the AO was not competent to charge the interest under Sections 234B and 234C of the Act when the total income of the assessee is determined on the book profit computed under Section 115JA of the Act. He, therefore, submitted that on merits also, no interest is chargeable in case of the assessee for all the assessment years under appeal as the assessee's total income is computed under Section 115JA of the Act.
5. Per contra, the learned Departmental Representative for the Revenue submitted that the decision of the Hon'ble Supreme Court in the case of Kwahty Biscuits Ltd. (supra) is not; applicable as far as the present appeals are concerned, as the said decision is rendered in the context of provisions of Section 115J and not in the context of Section 115JA of the Act which is applicable in the present cases. It was further argued that there is a substantial difference between Section 115J and Section 115JA because Sub-section (4) of Section 115JA provides that "all the provisions of this Act shall apply to every assessee". It means that except specifically provided under Section 115JA, even the liability to pay the advance tax is on the assessee. The learned Departmental Representative further submitted that while dismissing the appeal of the Revenue, the Supieme Court has not discussed anything but merely stated that the appeals are dismissed and hence that cannot be the precedent.
6. In rejoinder, the earned Counsel for the assesseo submitted that when the appeal or Special Leave Petition is dismissed without giving any reason, then what will be the binding effect as a precedent of the said decision, has been discussed by the Hon'ble Supreme Court in the case of Kunhayammed and Ors. v. State of Kerala and it is made clear by the Supreme Court that if the appeal is dismissed even with a non-speaking order, then the doctrine of merger is applicable and whatever principles have been laid down by the High Court have been approved and hence, even in case where the appeals are dismissed with non-speaking order, the same becomes the precedent having a binding effect. The earned Counsel further submitted that as far as the applicability of Sections 234B and 234C is concerned, the High Court of Karnataka has examined the scheme of Section 115J which is not different from Section 115JA and thereafter only it is hold that provisions of Sections 234H and 234C are not attracted as the entire exercise of computing the book profit could bo only at the end of the financial year and until and unless the accounts are audited and balance sheet prepared, oven the assessoe may not know whether the provisions of Section 115J would be applicable or not. Hence, the same principles are applicable to Section 115JA as provisions of Section 115JA are paxi matona to the provisions of Section 115J.
7. We have heard the rival submissions of the parties We have also carefully considered the facts as per material placed before, us. We have also considered the legal principles laid' down in the precedents relied on by the parties. The short issue which falls for our consideration is when the assessee company's income is determined under Section 115JA then whether there is a liability on the part of the assessee by virtue of Sections 207, 208, 209 and 210 to pay the advance tax and if advance tax is not paid as per the provisions of the IT Act or if there is a short payment of advance tax, then the assessee is liable for interest under Section 234B or 234C of the Act. In these cases, except one case relating to asst. yr. 1997-98, the interest is charged while processing the return under Section 143(1). The assessee challenged the levy on two different contentions. One contention taken by the assessee is that it is a debatable issue and hence, the AO has no power to charge interest as it cannot be within the scope of prima facie adjustment. As far as the contention on merits is concerned, no interest at all can be-charged under Sections 234B and 234C when the total income of the assessee is determined under Section 115JA of the Act. Now, we will have to examine the scheme of Section 115JA which is very important for determining the present issue.
8. The relevant provisions of Section 115JA read as under:
115JA. (1) Notwithstanding anything contained in any other provisions of this Act, where in the case of an assessee, being a company, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1997, but before the 1st day of April, 2001 thereafter in this section referred to as the relevant previous year) is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit.
(2) Every assessee, being a company, shall, for the purposes of this section prepare its P&L a/c for the relevant previous year in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act, 1956 (1 of 1956): Provided that while preparing P&L a/c, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the P&L a/c laid before the company at its annual general meeting in accordance with the provisions of Section 210 of the Companies Act, 1956 (1 of 1956):
Provided further that where a company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under the Act, the method and rates for calculation of depreciation shall correspond to the method and rates which have been adopted for calculating the depreciation for such financial year or part of such financial year falling within the relevant previous year.
Explanation. For the purposes of this section, 'book profit' means the net profit as shown in the P&L a/c for the relevant previous year prepared under Sub-section (2), as increased by
(a) the amount of income-tax paid or payable, and the provision therefor; or
(b) the amounts carried to any reserves by whatever name called; or
(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or
(d) the amount by way of provision for losses of subsidiary companies; or
(e) the amount or amounts of dividends paid or proposed; or
(f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies;
if any amount referred to in els. (a) to (f) is debited to the P&L a/c, and as reduced by,
(i)to(ix)...
(3) Nothing contained in Sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of Sub-section (2) of Section 32 or Sub-section (3) of Section 32A or Clause (ii) of Sub-section (1) of Section 72 or Section 73 or Section 74 or Sub-section (3) of Section 74A.
(4) Save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section.
9. Now, Section 115JA was brought on the statute book by the Finance (No. 2) Act, 1996, which was applicable from the asst. yr. 1997-98. The scope and effect of this section was explained in the CBDT Circular No. 762, dt. 18th Feb., 1998 (1998) 145 CTR (St) 5, and the relevant paragraphs are reproduced as under:
46.1 In recent times, the number of zero tax companies and companies paying marginal tax has grown. Studies have shown that in spite of the fact that companies have earned substantial book profits and have paid handsome dividends, no tax has been paid by them to the exchequer.
46.2 The Finance (No. 2) Act, 1996, has inserted a new Section 115JA of the IT Act, so as to levy a minimum tax on companies who are having book profits and paying dividends but are not paying any taxes. The scheme envisages the payment of a minimum tax by deeming 30 per cent of the book profits computed under the Companies Act, as taxable income, in a case where the total income as computed under the provisions of the IT Act, is less than 30 per cent of the book profit. Where the total income as computed under the normal provisions of the IT Act, is more than 30 per cent of the book profit, tax shall be charged on the same.
46.3 The effective minimum alternate tax, at the existing rates of taxation works out to 12 per cent of the book profits.
46.4 Income arising from free trade zone (FTZ), export-oriented undertakings (EOUs), charitable activities, investments by a venture capital company and other exempted incomes (s. 10) are excluded from the purview of the alternate tax.
46.5 Since the alternate tax is applicable only where the normal total income computed is less than 30 per cent of the book profits, so long as the enterprises (other than FTZ units and EOUs) earning income from export profits do not have their component of export income higher than 70 per cent of the book profits, the provisions of Section 115JA will not be attracted, In other words, the MAT will apply only to such cases where export profits forming part of book profits of an assessee exceed 70 per cent of the total profits.
46.6 Companies engaged in the business of generation and distribution of power and those enterprises engaged in developing, maintaining and operating infrastructure facilities under Sub-section (4A) of Section 80-IA are exempted from the levy of MAT, so that the incentive given to infrastructure development is not affected.
46.7 The amendment will take effect from 1st April, 1997, and will accordingly apply m relation to the asst. yr. 1997-93 and subsequent years.
10. From the scheme of this section, it is clear that it is a deeming provision of overriding nature on the same lines as that of Section 115J.. The taxable income of the assessee company is determined as provided in Sub-section (2) of Section 115JA which is as per the P&L a/c for the relevant previous year prepared in accordance with the provisions of Part 11 and Part III of Sch. VI to the Companies Act.
11. It is pertinent to note that earlier for the asst. yrs. 1988-89 to 1990-91; Section 115J was also in the nature of overriding effect. As far as Section 115J is concerned, the provision in the form of Sub-section (4) of Section 115JA was not in the said section.
12. Section 115JA had come for judicial scrutiny of the Hon'ble High Court of Kerala in the case of Apollo Tyres Ltd. (supra). After considering the Memorandum Explaining the Provisions in the Finance (No. 2) Act, 1996, it was held as under:
We refer to the new provision only to show that the said provision is, by and large, similar to the provisions of Section 115J itself. The only difference is that the said section has been restructured and certain minor changes are also made. As per Sub-section (2) of Section 115JA, every assessee, being a company, shall, for the purposes of Section 115JA, prepare its P&L a/c for the relevant previous year in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act, 1956. It provides that while preparing P&L a/c, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the P&L a/c laid before the company at its annual general body meeting in accordance with the provisions of Section 210 of the Companies Act, 1956. It also provides that where a company has adopted or adopts the financial year under the Companies Act, 1956, which is different from the previous year under the Act, the method and rates for calculation of depreciation shall correspond to the method and rates which have been adopted for calculating the depreciation for such financial year or part of such financial year falling within the relevant previous year. The Explanation to Sub-section (2) provides that for the purposes of this section, 'book profit' means the net profit as shown in the P&L a/c for the relevant previous year prepared under Sub-section (2) with the adjustments provided in els. (a) to (f) and (i) to (vii). Clause (iii) of the Explanation refers to the amount of loss brought forward or unabsorbed depreciation, whichever is less, as per books of account. The Explanation thereto says that for the purposes of this clause, the loss shall not include depreciation. Though the provisions of Section 115JA are applicable only for the asst. yr. 1997-98 onwards, it would appear that the restructuring of the section was necessitated only because of the dispute in regard to the determination of 'book profit' pending before the Courts and the Tribunals....
Hence, it is a well settled position of law that Section 115JA is pan materia to Section 115J of the Act.
13. The next question is regarding the applicability of the provisions of Sections 234B and 234C of the Act. As far as Section 234B is concerned, it comes into operation when there is a failure on the part of the assessee to pay the advance tax as per provisions of Section 208 or where advance tax paid by the assessee under Section 210 is less than 90 per cent of the assessed tax, then the assessee is liable to pay the simple interest as prescribed under the said section. As far as Section 234C is concerned, it is attracted when there is deferment of payment of advance tax as per the due date given in Section 208 of the Act. At this stage, it is not necessary to go into detailed discussion of both these sections. The core issue before us is whether the assessee is made liable to pay the tax by determining the book profit under Section 115JA then the provisions of Sections 234B and 234C are attracted for levy of penalty.
14. In the case of Kwality Biscuits Ltd. (supra), the issue before the Hon'ble Karnataka High Court was, when the assessee's income is computed by invoking the provisions of Section 115J of the Act, then whether the assessee is liable to pay the interest under Sections 234B and 234C. The Hon'ble Karnataka High Court examined the provisions of Section 115J and also the relevant provisions of Sections 207 to 210 and held as under:
Under Section 115J, where the total income of the company is less than 30 per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to 30 per cent of such book profit. It is thus by way of deeming fiction that this income has been considered to be the deemed income. The P&L a/c has to be prepared in accordance with the provisions of Parts II and HI of Sch. VI to the Companies Act. In the Explanation under Section 115J(1A), it is provided that for the purposes of this section 'book profit' means the net profit as shown in the P&L a/c for the relevant previous year prepared under Sub-section (1A) as increased by various amounts given in the section. Thus, for the purpose of assessing tax under Section 115J, firstly, the profit as computed under the IT Act has to be prepared and thereafter the book profits as contemplated by the provisions of Section 115J are to be determined and then the tax is to be levied. The liability of the assessee for payment of tax under Section 115J arises if the total income as computed under the provisions of the Act is less than 30 per cent of its book profits. This exercise for determining the total income in accordance with the provisions of the Act and that of book profit can be only after the end of the relevant assessment year. It is only the deemed income for which the provisions of Section 115J have been incorporated. When a deeming fiction is brought under the statute it is to be carried to its logical conclusion, but without creating further deeming fiction so as to include other provisions of the Act which are not specifically made applicable. Since the entire exercise of computing the income or that of book profit could be only at the end of the financial year, the provisions of Section 207, 208, 209 or 210 cannot be made applicable, until and unless the accounts are audited and the balance sheet is prepared even the assessee may not know whether the provision of Section 115J would be applicable or not. The liability would be after the book profits are determined in accordance with the Companies Act. The words 'for the purposes of this section' in the Explanation to Section 115J(1A) are relevant and cannot be construed to extend beyond the computation of liability of tax. Accordingly, we are of the view that the Tribunal was not justified in directing to charge interest under Sections 234B and 234C of the IT Act. This question No. 2 is, therefore, answered in favour of the assessee and against the Revenue.
15. The judgment of the Hon'ble Karnataka High Court in the case of Kwality Biscuits Ltd. (supra) was challenged by the Revenue before the Hon'ble Supreme Court reported* in (2006) 205 CTR (SC) 122 : (2006) 284 ITR 434 (SC)(supra) and the same was dismissed by order, "the appeals are dismissed".
16. The learned Departmental Representative has raised an objection that when no reasons are given by the Hon'ble Supreme Court, it will not have any binding effect. In this case, it is not disputed that it was the appeal before the Hon'ble Supreme Court. Now, when the appeal is dismissed without giving any reason and when the special leave petition is dismissed without giving any reasons, then whether the doctrine of merger is applicable or not and what will be the consequences of the dismissal of the appeal and special leave petition by non-speaking order has been explained by the Hon'ble Supreme Court in the case of Kunhayammed (supra) as under:
To sum up our conclusions are:
(i) Where an appeal or revision is provided against an order passed by a Court, Tribunal or any other authority before a superior forum and such superior forum modifies, reverses or affirms the decision put in issue before it, the decision by the subordinate forum merges in the decision by the superior forum and it is the latter which subsists, remains operative and is capable of enforcement in the eye of law.
(ii) The jurisdiction conferred by Article 136 of the Constitution is divisible into two stages. The first stage is upto the disposal of the prayer for special leave to file an appeal. The second stage commences if and when the leave to appeal is granted and the special leave petition is converted into an appeal.
(iii) The doctrine of merger is not a doctrine of universal or unlimited application. It will depend on the nature of jurisdiction exercised by the superior forum and the content or subject-matter of challenge laid or capable of being laid shall be determinative of the applicability of merger. The superior jurisdiction should be capable of reversing, modifying or affirming the order put in issue before it. Under Article 136 of the Constitution, the Supreme Court may reverse, modify or affirm the judgment, decree or order appealed against while exercising its appellate jurisdiction and not while exercising the discretionary jurisdiction disposing of a petition for special leave to appeal. The doctrine of merger can, therefore, be applied to the former and not to the latter.
(iv) An order refusing special leave to appeal may be a non-speaking order or a speaking one. In either case it does not attract the doctrine of merger. An order refusing special leave to appeal does not stand substituted in place of the order under challenge. All that it means is that the Court was not inclined to exercise its discretion so as to allow the appeal being filed.
(v) If the order refusing leave to appeal is an speaking order, i.e., gives reasons for refusing the grant of leave, then the order has two implications. Firstly, the statement of law contained in the order is a declaration of law by the Supreme Court within the meaning of Article 141 of the Constitution. Secondly, other than the declaration of law, whatever is stated in the order are the findings recorded by the Supreme Court which would bind the parties thereto and also the Court, Tribunal or authority in any proceedings subsequent thereto by way of judicial discipline, the Supreme Court being the apex Court of the country. But, this does not amount to saying that the order of the Court, Tribunal or authority below has stood merged in the order of the Supreme Court rejecting the special leave petition or that the order of the Supreme Court is the only order binding as res judicata in subsequent proceedings between the parties.
(vi) Once leave to appeal has been granted and the appellate jurisdiction of the Supreme Court has been invoked, the order passed in appeal would attract the doctrine of merger; the order may be of reversal, modification or merely affirmation.
(vii) On an appeal having been preferred or a petition seeking leave to appeal having been converted into an appeal before the Supreme Court, the jurisdiction of the High Court to entertain a review petition is lost thereafter as provided by Sub-rule (1) of r. 1 of 0. XLVII of the Code of Civil Procedure.
17. Considering the principles laid down by the Hon'ble Supreme Court in the case of Kunhayammed (supra), in our opinion, there is no substance in the argument of the learned Departmental Representative. As far as the decision in the case of Kwality Biscuits Ltd. (supra) is concerned, the principles laid down in the said decision are squarely applicable to the provisions of Section 115JA also as the basic scheme of Section 115JA is like that of Section 115J only. Merely because Sub-section (4) of Section 115JA states that "save as otherwise provided in that section all other provisions of the Act are applicable" makes no difference.
18. The decision in the case of Kwality Biscuits Ltd. (supra) by the Hon'ble High Court of Kamataka has been considered in the context of Section 115JA by the same High Court in the case of C1T v. SKS Refineries (P) Ltd., IT Appeal No. 2416 of 2005, dt. 31st Jan., 2006 (unreported). The Hon'ble High Court has examined the applicability of the principles laid down in the case of Kwality Biscuits Ltd. (supra) in the context of Section 115JA and has held as under:
3. The present case arises under Section 115JA of the Act which deals with deemed income relating to certain companies. The principle enunciated in the aforesaid judgment would equally apply to the assessment involved in this appeal also, as we are in respectful agreement with the law declared by this Court in the case of Kwality Biscuits Ltd. (supra). In that view of the matter, we do not find any merit in this appeal. Accordingly it is dismissed.
19. After examining this issue in the backdrop of the legal principles laid down by the Hon'ble Supreme Court as well as other High Courts, we are of the opinion that the legal principles in the case of Kwality Biscuits Ltd. (supra) are squarely applicable to the provisions of Section 115JA and hence, if the income of the assessee company is determined by invoking Section 115JA, then no interest under Sections 234B and 234C can be charged. As far as the issue of prima facie adjustment is concerned, we are of the opinion that the law declared by the Supreme Court was always the law in existence. Hence, the AO was not competent to charge the interest under Section 234B or 234C of the Act when the income is determined on the basis of book profit computed under Section 115JA. We, therefore, allow the appeals by the assessee for the asst. yrs. 1997-98, 1998-99, 1999-2000 and 2001-02. Hence, this common issue is decided in favour of the assessee and against the Revenue.
20. The next issue is levy of surcharge and this issue arises in ITA No. 452/Coch/2004 which is relevant to the asst. yr. 1997-98 and the subject-matter of the assessment order which is passed under Section 143(3) of the Act. The assessee's assessment for the asst. yr. 1997-98 was completed under Section 143(3) of the Act. The AO worked out the income under the normal provisions of the Act at Rs. 1,17,180 and also worked out the book profit at Rs. 1,34,31,375 and 30 per cent thereof amounting to Rs. 40,29,413 was taken as an income of the assessee under Section 115JA of the Act. The AO, therefore, worked out the total tax payable at the rate of 40 per cent on the income determined under Section 115JA at Rs. 15,11,764 and levied the surcharge on the said income-tax which was Rs. 1,20,882.
21. The assessee challenged the levy of surcharge before the CIT(A) but the CIT(A) upheld the action of the AO levying surcharge by observing as under:
(ii) I have considered the objections of the appellant. The levy of surcharge for any assessment year has to be as per the provisions of the Finance Act of that assessment year. The Finance Act, 1997, provides in Section 2(1) of that Act that for the assessment year commencing on the first day of April, 1997, income tax shall be charged at the rate specified in Part I of the First Schedule and such tax shall be increased in the cases to which Para E of that part applies, by a .surcharge1, calculated in the manner provided therein. The Para E provides that in the case of every domestic company having a total income exceeding Rs. 75,000, the amount of income-tax shall be increased by a surcharge @ 7.5 per cent of such income-tax. Therefore, it is obvious that the appellant is liable to pay surcharge on the income-tax calculated on the total income which in the appellant's case is 30 per cent of the book profits. Therefore, I have to hold that levy of surcharge is correct. The objection of the appellant in this regard is rejected.
Now, the assessee has challenged the levy of surcharge before us.
22. We have heard the senior counsel, Shri Sarangan, for the assessee on this issue and the learned Departmental Representative, Smt. Beena Sarasan, for the Revenue. The earned Counsel for the assessee in sum and substance submitted that the total income of the assessee is determined as per the provisions of Section 115JA and hence, as per the scheme of the said section, the assessee is required to pay the Minimum Alternate Tax (MAT) due to the said deeming provision. The earned Counsel further submitted that by virtue of Section 115JAA of the Act, when the income is determined by invoking Section 115JA, then tax credit in respect of MAT paid is allowed to be carried forward for set off against the regular tax payable during the subsequent five years' period. He, therefore, submitted that as the surcharge is additional levy that cannot be levied when the total income is determined by invoking the deeming provisions of Section 115JA of the Act. He also referred to Para E of the First Schedule to the Finance Act, 1997.
23. On the other hand, the learned Departmental Representative supported the orders of the AO as well as CIT(A). She further submitted that when the assessee is required to pay MAT under Section 115JA on the 30 per cent of the book profit, it does not mean that the assessee has no taxable income. Moreover, the legislature has provided for giving the tax credit in respect of the subsequent five years. Hence, if at all the surcharge is levied on the element of MAT, the assessee is eligible to carry forward the same and set off against the regular tax payable.
24. We have heard the rival submissions of the parties. Surcharge is in the nature of additional levy on the income-tax. Section 4 is a charging section which provides that income-tax shall be charged for any assessment year as per the rate prescribed under the Central Act including the provisions for levy of the additional income-tax in respect of the total income of the previous year of the assessee. Now, Central Act means the Finance Act in which the rates applicable to the assessment year are prescribed. For the asst. yr. 1997-98, Finance Act, 1997 (1997) 139 CTR (St) 1 : (1997) 225ITR (St) 113} has prescribed the rates of income-tax. As far as the assessee is concerned, Para E of Part I to the First Schedule is relevant as the said paragraph deals with the rates of income-tax in case of a company. Below Para E, surcharge is provided which reads as under:
Surcharge on income-tax:
The amount of income-tax computed in accordance with the provisions of this paragraph or Sections 112 and 113 of the IT Act, shall, in the case of every domestic company having a total income exceeding seventy-five thousand rupees, be increased by a surcharge calculated at the rate of seven-and-a-half per cent of such income-tax.
Now, the argument of the earned Counsel is that levy of surcharge is contemplated in Para E in respect of the income-tax which is charged on the income determined according to the regular provisions of the IT Act. Moreover, there is no reference of Section 115JA when the legislature has made the reference in Sections 112 and 113 of the Act. According to the learned senior counsel, in this case, total income is determined under the deeming provisions and hence surcharge cannot be levied. We find substance in the argument of the learned Departmental Representative that it is not in each and every case that there is no taxable income but at the same time, the assessee is required to pay MAT. There are cases when the assessee has a regular taxable income and at the same time it is being below 30 per cent of the book profit as computed under Section 115JA, the assessee is required to pay the MAT. Moreover, by virtue of provisions of Section 115JAA, the relief by way of tax credit is given to the assessee in respect of the tax element which the assessee is required to pay more due to determination of his income under Section 115JA. In our opinion, though the assessee is required to pay the surcharge, still by virtue of the provisions of Section 115JA, the assessee is entitled to get relief in respect of the extra payment of surcharge due to determination of its income under Section 115JA. The earned Counsel has referred to Sections 112 and 113 of the Act but there is a difference between Sections 112, 113 and Section 115JA as in those sections in the Act itself, special rates of tax have been prescribed. Therefore, in our opinion, at the regular assessment stage when the income is determined on the basis of book profit as per provisions of Section 115JA, surcharge is leviable. We, therefore, decide this issue against the assessee and in favour of the Revenue.
25. The next issue is adjustment made by the AO while computing the book profit for the asst. yr. 1997-98 and this issue arises in ITA No. 452/Coch/2004. As stated hereinabove, the assessment of the assessee is completed under Section 143(3). The AO determined the total income as per the normal provisions of the Act as well as computed the book profit for the purpose of Section 115JA. It was noticed by the AO that the assessee has computed the book profit at Rs. 99.67,798 and 30 per cent of the said amount was declared as the income under Section 115JA. While computing the net profit, the assessee has claimed the arrears of depreciation at Rs. 34,63,577 which were debited to the P&L a/c. The explanation of the assessee was that during the previous year relevant to the asst. yr. 1997-98, the assessee company changed its method of charging depreciation from Straight Line Method (SLM) to Written Down Value Method (WDVM) and to get the correct picture of the profit it appears that after change of the method depreciation relating to the earlier year was included in the previous year's depreciation. The AO was of the opinion that as per the decision of the Hon'ble High Court of Kerala in the case of CIT v. Apollo Tyres Ltd. (supra), no adjustment can be made to the profit by providing arrears of depreciation in the P&L a/c as the assessee used to prepare P&L a/c in accordance with Part II and Part III of Sch. VI to the Companies Act which is the requirement of Section 115JA. The AO was of the opinion that provisions of Section 115JA are identical with those of Section 115J and hence while computing the book profit under Section 115JA, the AO disallowed the amount of the depreciation included in the total depreciation and made the addition of Rs. 34,63,577 and thereafter, worked out the book profit for the purpose of Section 115JA,
26. The assessee challenged the action of the AO before the CIT(A). The CIT(A) was of the opinion that the extra depreciation of Rs. 34,63,577 represented the arrears of depreciation relatable to the previous year which has been brought forward by the assessee as per the books of account. The assessee relied on the two decisions of the Hon'ble Supreme Court in the cases of (i) Surana Steel (P) Ltd. v. Dy. CIT and (li) Apollo Tyres Ltd. v. CIT , but in the opinion of the CIT(A), both these decisions were distinguishable as in case of Surana Steel (?) Ltd. (supra), the issue before the Hon'ble Supreme Court was whether the law as appearing in Clause (b) of the first proviso to Section 205(1) of the Companies Act included depreciation or not and in that context the Supreme Court held that for the purpose of Clause (iv) of Explanation to Section 115J, the loss included depreciation. In assessee's case, Section 115J is applicable and Clause (lii) to said section is materially different from the provisions contained in Clause (iv) of the Explanation to Section 115J. As far as the decision in the case of Apollo Tyres Ltd. (supra) is concerned, the CIT(A) was of the opinion that it is also distinguishable as it was concerning Section 115J. In the opinion of the CIT(A), the provisions of Sub-clause (iii) of Explanation to Section 115JA were existing which was for consideration before the Supreme Court. The CIT(A), therefore, rejected the contention of the assessee. Now, the assessee has challenged the finding of the CIT(A) before us.
27. The learned senior counsel, Shri G. Sarangan, submitted that the AO is not empowered to tinker with the figures disclosed by the financial statements which are audited and approved by the general body. He further submitted that the financial statements of the assessee have been prepared in accordance with Part I and Part II of Sch. VT to the Companies Act. It was further argued that the arrears of depreciation represented depreciation in respect of the earlier year consequent to the change in the method of charging depreciation from SLM to WDVM. He further submitted that the charging of arrears of depreciation was strictly in accordance with the provisions of the Companies Act, 1956. The earned Counsel also relied on the Accounting Standard VI (AS-6) issued by the Institute of Chartered Accountants of India which is mandatory in respect of the treatment to be given to depreciation in the accounts. It was further argued that according to said AS-6 which is in conformity to the Companies Act, the difference or surplus arising from retrospective re-computation of depreciation in accordance with the new method should be adjusted in the accounts in the year in which the method of depreciation is changed. The earned Counsel further submitted that the CIT(A) has relied on Expln. (iii) to Section 115JA for justifying the action of the AO in adding back of arrears of depreciation. The Expln. (iii) specifies only what has to be reduced from the profit as shown by the P&L a/c, but it does not specify the items to be added back in determining the book profit. It was further argued that if there is a change in the method of depreciation, the arrears of depreciation provided cannot be equated with the concept of brought forward loss or unabsorbed depreciation and the arrears of depreciation charged in the P&L a/c which relate back to the earlier year is current year's depreciation. The earned Counsel further submitted that the decision of the Hon'ble High Court of Kerala in the case of Apollo Tyies Ltd. (supra) has been reversed by the Hon'ble Supreme Court reported in (2002) 174 CTR (SC) 521 : (2002) 255 H'R 273 (SC)(supra) on the issue of treatment to be given to arrears of depreciation which are debited to the P&L a/c. The learned senior counsel relied on the decisions in the cases of (i) Apollo Tyres Ltd. v. C1T (supra) and (ii) Kinetic Motor Co. Ltd. v. Dy. CIT .
28. Per contra, the learned Departmental Representative in sum and substance reiterated the findings of the C1T(A) as her arguments. The learned Departmental Representative also filed written submissions which are taken on record.
29. We have heard the rival submissions of the parties. We have also carefully considered the principles laid down in the precedents relied on by the parties. The issue for our consideration is in respect of the treatment to be given to the arrears of depreciation which are profit due to change in the method of depreciation.
30. In the case of Apollo Tyres Ltd. (supra), the judgment of the Hon'ble High Court of Kerala in (supra) was challenged and the issue of treatment to be given to depreciation while computing the book profit under Section 115J was for consideration. After examining the provisions of Section 115J, the Hon'ble Supreme Court held as under:
The above speech 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 of these companies within the tax net that Section 115J was introduced in the IT Act with a deeming provision which makes the company liable to pay tax on at least 30 per cent of its book profits as shown in its own account. For the said purpose, Section 115J makes the income reflected in the company's books of account the deemed income for the purpose of assessing the tax. If we examine the said provision in the above background, we notice that the use of the words 'in accordance with the provisions of Parts II and III ol Sch. VI to the Companies Act' was made for the limited purpose of empowering the assessing authority to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, an AO under the IT Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinised and certified by the statutory auditors and will have to be approved by the company in its general meeting, and thereafter to be filed before the Registrar of Companies who has an statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. In spite of all these procedures contemplated under the provisions of the Companies Act, we find it difficult to accept the argument of the Revenue that it is still open to the AO to re-scrutinise this account and satisfy himself that these accounts have been maintained in accordance with the provisions of the Companies Act. In our opinion, reliance placed by the Revenue on Sub-section (1A) of Section 115J of the IT Act in support of the above contention is misplaced. Sub-section (1A) of Section 115J does not empower the AO to embark upon a fresh inquiry in regard tc the entries made in the books of account of the company. The said Sub-section, as a matter of fact, mandates the company to maintain its accounts in accordance with the requirements of the Companies Act which mandate, according to us, is bodily lifted from the Companies Act into the IT Act for the limited purpose of making the said account so maintained as a basis for computing the company's income for levy of income-tax. Beyond that, we do not think that the said Sub-section empowers the authority under the IT Act to probe into the accounts accepted by the authorities under the Companies Act. If the statute mandates that income prepared in accordance with the Companies Act shall be deemed income for the purpose of Section 115J of the Act, then it should be that income which is acceptable to the authorities under the Companies Act. There cannot be two incomesone for the purpose of the Companies Act and Anr. for the purpose of income-tax, both maintained under the same Act. If the legislature intended the AO to reassess the company's income, then it would have stated in Section 115J that 'income of the company as accepted by the AO'. In the absence of the same and on the language of Section 115J, it will have to be held that view taken by the Tribunal is correct and the High Court has erred in reversing the said view of the Tribunal.
Therefore, we are of the opinion, the AO while computing the income under Section 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The AO thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section, To put it differently, the AO does not have the jurisdiction to go behind the net profit shown in the P&L a/c except to the extent provided in the Explanation to Section 115J.
31. In the case of Kinetic Motor Co. Ltd. (supra), it has been held as under:
The assessee was a public limited company engaged in the business of manufacture and sale of two-wheelers. For the asst. yr. 1990-91, in the books of account maintained for the statutory previous year (i.e. financial year) 1st April, 1989, to 31st March, 1990, the assessee debited an amount of Rs. 6,32,65,430 on account of depreciation. This depreciation was calculated on the WDV method, which is one of the permissible methods under the Companies Act as well as under the IT Act, although the assessee used to provide the depreciation on the straightline method in its corporate accounts. The above treatment resulted in a book loss of Rs. 1,64,49,937. These accounts were certified to be true and fair by the auditors. The AO took the view that there was no justification for the assessee to change the basis of providing depreciation. The AO re-worked the depreciation and arrived at a revised figure of book profit of Rs. 2,22,10,525 as against book loss of Rs. 1,64,49,937. This was confirmed by the Tribunal. On further appeal to the High Court:
Held, that it was not in dispute that under the Companies Act, both the straightline method and WDV method are recognized. Therefore, once the amount of depreciation actually debited to the P&L a/c was certified by the auditors, it was not permissible for the AO to make book adjustments.
32. On the perusal of the reasons given by the AO as well as the CIT(A) for adding back the arrears of depreciation which was provided due to the change in the method of working of the depreciation, it appears that both tried to distinguish Sections 115J and 115JA. We have already expressed that Sections 115J and 115JA both are deeming provisions and book profit is to be worked out as per the provisions of the Companies Act. What is to be added back to the book profit has been specifically provided by Explns. (a) to (f) to Section 115JA in which there is no reference in respect of the treatment to be given to the arrears of depreciation provided in case the assessee changes the method of depreciation which is debited to the P&L a/c. In our opinion, the principles laid down by the Hon'ble Supreme Court in the case of Apollo Tyies Ltd. (supra) are squarely applicable for working out the book profit under Section 115JA also. We, therefore, direct the AO to delete the sum of Rs. 34,63,577 which represents the arrears of depreciation included in the depreciation debited to the P&L a/c for the reasons stated hereinabove and set aside the order of the CIT(A) on this issue.
33. In the result, the assessee's appeals ITA No. 452/Coch/2004 is partly allowed, ITA Nos. 453, 454 and 456/Coch/2004 are allowed. The Revenue's appeal ITA No. 1300/Coch/2004 is dismissed.