S.C : The CIT(A) directing the AO to allow the claim of depreciation as per the IT Rules, 1962, for the purposes of computing the book profit under s. 115J

Supreme Court Of India

Dynamic Orthopedics (P) Ltd. vs. CIT

Section 115J; IT Rule 5, COMP 205, COMP 349, COMP 350, COMP Sch. VI, Parts II, COMP Sch. VI, III

Asst. Year 1990-91

S.H. Kapadia & Aftab Alam, JJ.

Civil Appeal No. 8419 of 2003

16th February, 2010

Counsel Appeared :

Subramonium Prasad, for the Appellant : Vivek Tankha with B.V. Balaram Das, for the Respondent

ORDER

S.H. KAPADIA, J. :

A short question which arises for determination in this civil appeal is—whether the Tribunal was, on the facts and circumstances of this case, justified in upholding the order of the CIT(A) directing the AO to allow the claim ofdepreciation as per the IT Rules, 1962, for the purposes of computing the book profit under s. 115J of the IT Act, 1961 ? In this civil appeal, we are concerned with asst. yr. 1990-91. The appellant-assessee is a private limited company engaged in the manufacture and sale of Orthopaedic appliances. In the return of income filed, the assessee returned an income of Rs. 1,50,730. In the P&L a/c, depreciation was provided at the rates specified in r. 5 of the IT Rules, 1962 (‘Rules’, for short). While completing the assessment of income, the AO recomputed the book profit for the purpose of s. 115J of the IT Act, 1961 (‘Act’, for short), after allowing depreciation as per Sch. XIV to the Companies Act. The rates of depreciation specified in Sch. XIV to the Companies Act, 1956 (‘1956 Act’, for short) were lower than the rates specified under r. 5 of the Rules. Being aggrieved by the assessment order, the assessee took up the matter before the Commissioner of Income-Tax (Appeals) [‘CIT(A)’, for short], who came to the conclusion that the assessee was a private limited company. It was not a subsidiary of a public company. Therefore, placing reliance on s. 355 of 1956 Act, the CIT(A) held that s. 350 of 1956 Act was not applicable to the assessee and, in the circumstances, the ITO had erred in providing depreciation at the rates specified under Sch. XIV to 1956 Act. Consequently, the CIT(A) held that the assessee was right in providing depreciation in its accounts as per r. 5 of the Rules. Aggrieved by the decision of the CIT (A), ITA No. 115 of 1993 was preferred by the Department to the Income-tax Appellate Tribunal (‘Tribunal’, for short). By judgment and order dt. 13th Jan., 1999, the Tribunal held that, since the assessee was a private limited company, s. 349 and s. 350 were not applicable to the facts of the case and, in the circumstances, the ITO had erred in directing the assessee, which was a private limited company, to provide for depreciation as per Sch. XIV to 1956 Act, which was not applicable to the private limited companies (see s. 355 of 1956 Act). Consequently, the appeal filed by the Department before the Tribunal stood dismissed.

Aggrieved by the said decision of the Tribunal, the Department preferred IT Appeal No. 66 of 1999 before the High Court of Kerala [reported as CIT vs. Dynamic Orthopedics (P) Ltd. (2002) 176 CTR (Ker) 432—Ed.] which held that s. 115J of the Act was introduced in asst. yr. 1988-89 to take care of the phenomenon of prosperous ‘zero tax’ companies which had continued despite the enactment of s. 80VVA of the Act. These companies were paying no income-tax though they had profits and though they were declaring dividends. Consequently, s. 115J of the Act was inserted to levy a minimum tax on book profits of certain companies. According to the High Court, s. 115J of the Act read with Explanation cl. (iv), as it stood at the material time, was a piece of legislation by incorporation and, consequently, the provisions of s. 205 of 1956 Act stood incorporated into s. 115J of the Act, hence, the ITO was right in directing the assessee to provide for depreciation at the rate specified in Sch. XIV to 1956 Act and not in terms of r. 5 of the Rules. Hence, this civil appeal is filed by the assessee. To answer the controversy, we quote hereinbelow the relevant provision(s) of the Companies Act, 1956, IT Act, 1961, as it stood at the material time, as also IT Rules, 1962 : “Provisions of the Companies Act, 1956 : 205. (1) No dividend shall be declared or paid by a company for any financial year except out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-s. (2) or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with those provisions and remaining undistributed or out of both or out of moneys provided by the Central Government or a State Government for the payment of dividend in pursuance of a guarantee given by that Government. 349. (1) In computing for the purpose of s. 348, the net profits of a company in any financial year— (a) ………… (b) the sums specified in sub-s. (4) shall be deducted, and those specified in sub-s. (5) shall not be deducted. ………… (4) In making the computation aforesaid, the following sums shall be deducted— (a) to (j) ………… (k) depreciation to the extent specified in s. 350. 350. Ascertainment of depreciation.—The amount of depreciation to be deducted in pursuance of cl. (k) of sub-s. (4) of s. 349 shall be the amount calculated with reference to the WDV of the assets as shown by the books of the company at the end of the financial year expiring at the commencement of this Act or immediately thereafter and at the end of each subsequent financial year at the rate specified in Sch. XIV.” Provisions of IT Act, 1961 : “115J(1A). 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). (a) to (d) ………… (e) the amount or amounts of dividends paid or proposed.” Provisions of IT Rules, 1962 : “5. Depreciation.—(1) Subject to the provisions of sub-r. (2), the allowance under cl. (ii) of sub-s. (1) of s. 32 in respect of depreciation of any block of assets shall be calculated at the percentages specified in the second column of the Table in Appendix I to these rules on the WDV of such block of assets as are used for the purposes of the business or profession of the assessee at any time during the previous year.”

6. In this case, the question which arose for determination before the High Court was—whether the CIT(A) was right in directing the AO to allow the claim of depreciation made by the assessee as per the IT Rules, 1962, for the purposes of computing the book profit under s. 115J of the Act, as it stood at the material time ? The High Court allowed the appeal filed by the Department holding that the AO was right in recomputing the book profit for the purpose of s. 115J of the Act after allowing depreciation as per Sch. XIV to the 1956 Act and not as per the rates specified in r. 5 of the IT Rules, 1962, as claimed by the assessee. This view of the High Court, in the present case, was similar to the view taken by it in the case of CIT vs. Malayala Manorama Co. Ltd. (2002) 172 CTR (Ker) 600 : (2002) 253 ITR 378 (Ker), which High Court’s judgment stood reversed by the judgment of this Court in the case of Malayala Manorama Co. Ltd. vs. CIT (2008) 216 CTR (SC) 102 : (2008) 6 DTR (SC) 1 : (2008) 300 ITR 251 (SC).

7. In our view, with respect, the judgment of this Court in Malayala Manorama Co. Ltd. vs. CIT (supra) needs reconsideration for the following reasons : Chapter XII-B of the Act containing “Special provisions relating to certain companies” was introduced in the IT Act, 1961, by the Finance Act, 1987, w.e.f. 1st April, 1988. In fact, s. 115J replaced s. 80VVA of the Act. Sec. 115J (as it stood at the relevant time), inter alia, provided that where the total income of a company, as computed under the Act in respect of any accounting year, was less than thirty per cent of its book profit, as defined in the Explanation, the total income of the company, chargeable to tax, shall be deemed to be an amount equal to thirty per cent of such book profit. The whole purpose of s. 115J of the Act, therefore, was to take care of the phenomenon of prosperous ‘zero tax’ companies not paying taxes though they continued to earn profits and declare dividends. Therefore, a MAT was sought to be imposed on ‘zero tax’ companies. Sec. 115J of the Act imposes tax on a deemed income. Sec. 115J of the Act is a special provision relating only to certain companies. The said section does not make any distinction between public and private limited companies. In our view, s. 115J of the Act legislatively only incorporates provisions of Parts II and III of Sch. VI to 1956 Act. Such incorporation is by a deeming fiction. Hence, we need to read s. 115J(1A) of the Act in the strict sense. If we so read, it is clear that, by legislative incorporation, only Parts II and III of Sch. VI to 1956 Act have been incorporated legislatively into s. 115J of the Act. Therefore, the question of applicability of Parts II and III of Sch. VI to 1956 Act does not arise. If a company is a MAT company, then be it a private limited company or a public limited company, for the purposes of s. 115J of the Act, the assessee-company has to prepare its P&L a/c in accordance with Parts II and III of Sch. VI to 1956 Act alone. If, with respect, the judgment of this Court in Malayala Manorama Co. Ltd. (supra) is to be accepted, then the very purpose of enacting s. 115J of the Act would stand defeated, particularly when the said section does not make any distinction between public and private limited companies. It needs to be reiterated that, once a company falls within the ambit of it being a MAT company, s. 115J of the Act applies and, under that section, such an assessee-company was required to prepare its P&L a/c only in terms of Parts II and III of Sch. VI to 1956 Act. The reason being that rates of depreciation in r. 5 of the IT Rules, 1962, are different from the rates specified in Sch. XIV of 1956 Act. In fact, by the Companies (Amendment) Act, 1988, the linkage between the two has been expressly delinked. Hence, what is incorporated in s. 115J is only Sch. VI and not s. 205 or s. 350 or s. 355. This was the view of the Kerala High Court in the case of CIT vs. Malayala Manorama Co. Ltd. (supra), which has been wrongly reversed by this Court in the case of Malayala Manorama Co. Ltd. vs. CIT (supra).

8. For the aforestated reasons, the Registry is directed to place this civil appeal before the learned Chief Justice for appropriate directions as we are of the view that the matter needs reconsideration by a Larger Bench of this Court.

 

[Citation : 321 ITR 300]

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