Case: Karnataka Small Scale Industries Development Corporation Ltd Vs. Commissioner of Income Tax, Bangalore

per cent, of its book profit... This measure will yield a revenue gain of approximately Rs. 75 crores.16. In addition, a contemporaneous exposition of the purport of section 115J is contained in Circular No. 495 dated 22nd September 1987 issued by the Central Board of Direct Taxes [Reported in 168 ITR (St.) p.87 at page 111]. The Circular gives explanatory notes on the provisions relating to direct tax in the Finance Act. With reference to section 115J, it was said:"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". 17. The Division Bench of the Andhra Pradesh High Court in Suryalatha Spg. Mills Ltd. (supra) had construed section 115J in favour of the Revenue inter alia because: "the very object of the provision of section 115J is to tax such companies which are making huge profits and also declaring substantial dividends, but are managing their affairs in such a way as to avoid payment of income tax, as a result of various tax concessions and incentives and for that purpose the taxable income is determined under sub-section (1) of section 115J, if any loss equal to the income thus determined is allowed to be adjusted, then that would frustrate and nullify the very object of enacting the provision". The reasoning appears to us to be unexceptionable. 18. In Lallcherra Tea Co. (O) Ltd. vs. Commissioner of Income Taxs 239 ITR 611 relied upon by the appellant, the Guwahati High Court was considering a case of an assessee -company which had filed a return in which the total income computed was less than 30 per cent of its book profit. After computing its book profit, in terms of section 115-J(1), a sum of Rs. 74,477/- was deemed to be the total income chargeable to tax for the assessment year, namely, 1987-88. In the assessment year 1988-89, the company sought to deduct the sum of Rs. 74,477/- rounded off to Rs. 74,450/- from its total income. The Revenue opposed this. The submission of the assessee was that the tax would not have been demanded against the amount which was adjusted. Upsetting the finding of the Tribunal, the Court held in favour of the assessee on the basis of a hypothetical example which, in our view, proceeds on a complete mis-appreciation of section 115-J. 19. The decision of this Court in Madeva Upendra Sinai vs. Union of India (supra) related to the constitutional validity of the Taxation Laws (Extension to Union Territories) (Removal of Difficulties) Order No. 2 of 1970 by which the provisions of the Act were extended with certain amendments to the Union Territories of Goa, Daman and Diu w.e.f. 1st April, 1963. The decision turned on the wording of section 43(6) of the 1961 Act which defines written down value in so far as it is relevant: (a) in the case of assets acquired in the previous year, the actual cost to the assessee;(b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act, or under the Indian Income Tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian Income-tax Act, 1886 (2 of 1886) was in force. 20. Under the laws in force in the former Portuguese territory, no allowance in the nature of depreciation was permitted in computing the gross income. According to the assessees since there was no depreciation allowed under the Portuguese law in the said relevant previous year, it could not be said to have been actually allowed and that, therefore, they were entitled to adjust the entire depreciation in the accounting year. This was more than what was available to assessee who had all along been covered by the 1961 Act. Parity amongst the assessees was sought to be brought about by the impugned Order by providing notional depreciation in prior years for the new assessee. This was held to be unconstitutional. In this context, the Court held that: "... The word depreciation actually allowed in section 43(6)(b) connote depreciation that has actually been taken into account and given effect to by the income tax authorities in the computation of the profits and gains of the business in assessing income tax for earlier years". 21. Since there was no law between the date the territories were merged in India and the date when the Income Tax Act was extended to those territories under which the income of those prior could be computed, there was no question of any depreciation being claimed, allowed or carried forward by the assessee for any year prior to 1963. A similar decision was taken by this Court in Commissioner of Income Tax, Bombay City I V. Dharampur Leather Co. Ltd. (supra). Both decisions are distinguishable since, for the reasons stated we have held that there is no notional but actual deduction in this case.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]13. The first stage referred to above envisages computation of income under the Act, that is, after taking into consideration all deductions allowable under the Act. It is only after the deductions are given effect to, and if the resultant income is less than 30 per cent of the book profit, that the assessees total income would be deemed to have a notional income fixed at 30 per cent of its book profit. It may be that the assessees are not required to pay tax on the figure of the assessable income arrived at after deducting the amounts permissible under the Act. However, it cannot be said that therefore the deductions are not taken into account. If the deductions had not in fact been allowed then the assessee would not have had an assessable income lesser than 30 per cent of its book profit, entitling it to pay tax only on 30 per cent of its book profit. In deeming that total income to be 30 per cent of the book profit, the deductions claimed are not ignored as contended by the appellants but are a necessary ingredient of the formula for applying the fictional total income. The decisions cited in the context of the operation of statutory fictions are not apposite as there is no notional or fictional but actual deduction. Once the deductions are taken into consideration and the assessee is put into the category of those companies covered by section 115J(1) only then is the assessee required to pay on a notional income of 30 per cent of its book profits.14. Had sections 115J not been introduced, the assessee would have been entitled under the provisions of section 32(2), 32(A)(3), 72(I)(ii), 73, 74, 74A(3) and 80(J)(3) to carry forward only the unabsorbed depreciation allowance under section 32, investment allowance under section 32-A, losses under sections 72, 72A, 73, 74 and permissible deductions under section 80J to the following assessment year to be set off against the profits and gains of that assessment year. All that section 115-J(2) does is to preserve this right viz. to carry forward the balance of the unabsorbed deductions in the relevant previous year to the next assessment year. Section 115-J does create any right nor does it serve to allow all the deductions taken into consideration for determining whether the total income should be quantified under section 115-J(1), to be carried forward under sub-section 2 of section 115-J. It allows only the unabsorbed losses, depreciation, investment allowance etc. which otherwise could have been carried forward, to be carried forward.Under the laws in force in the former Portuguese territory, no allowance in the nature of depreciation was permitted in computing the gross income. According to the assessees since there was no depreciation allowed under the Portuguese law in the said relevant previous year, it could not be said to have been actually allowed and that, therefore, they were entitled to adjust the entire depreciation in the accounting year. This was more than what was available to assessee who had all along been covered by the 1961 Act. Parity amongst the assessees was sought to be brought about by the impugned Order by providing notional depreciation in prior years for the new assessee. This was held to be unconstitutional.Since there was no law between the date the territories were merged in India and the date when the Income Tax Act was extended to those territories under which the income of those prior could be computed, there was no question of any depreciation being claimed, allowed or carried forward by the assessee for any year prior to 1963. A similar decision was taken by this Court in Commissioner of Income Tax, Bombay City I V. Dharampur Leather Co. Ltd. (supra). Both decisions are distinguishable since, for the reasons stated we have held that there is no notional but actual deduction in this case.