Holding

Deductions are taken into account in determining the notional income under Section 115‑J(1) and only the unabsorbed portion of losses, depreciation, investment allowance, etc., may be carried forward under Section 115‑J(2).

Summary

The Karnataka Small Scale Industries Development Corporation Ltd. and several other companies were assessed under Section 115‑J of the Income‑Tax Act, 1961, which imposes tax at 30 % of book profit when the normal taxable income is less than that threshold. The assessee‑companies claimed that deductions such as depreciation, investment allowance and business losses, although permitted under the Act, were not actually allowed because tax was computed on the notional 30 % of book profit, and therefore they should be allowed to carry forward these deductions under Section 115‑J(2). The Revenue argued that the deductions are taken into account in the first stage of the Section 115‑J calculation and that only the unabsorbed portion of such deductions may be carried forward, not those already used to determine the notional income. The Supreme Court held that the deductions are a necessary ingredient of the formula for computing the notional income and that Section 115‑J(2) merely preserves the right to carry forward the balance of unabsorbed deductions, not all deductions considered. Consequently, the Court dismissed the appeals, confirming the High Court’s order.

Issues considered

Whether deductions permissible under the Income‑Tax Act are deemed actually allowed when tax is levied on 30 % of book profit under Section 115‑J
Whether such deductions can be carried forward under Section 115‑J(2)

Legislation cited

Companies Act, 1956s. Schedule VI Parts II and III
Income Tax Act, 1961s. 115-J, s. 32, s. 32A, s. 72, s. 73, s. 74, s. 74A, s. 80J

Subjects

Income TaxSection 115-Jbook profitminimum corporate taxdeductionscarry forwardnotional incomestatutory fiction

Judgment

KARNATAKA SMALL SCALE INDUSTRIES DEVELOPMENT A
CORPORATION LTD.
v
COMMISSIONER OF INCOME TAX, BANGALORE

DECEMBER 3, 2002
B
[RUMA PAL AND B.N. SRIKRISHNA, JJ.]

Income Tax Act, 1961:

Section 115-J-Special provisions for assessment of Tax on book profit C
for certain period/previous years in respect of certain companies-Deductions
under other provisions of the Act-Held, such deductions are necessary
ingredient of the formula under the said provision of law which is taken into
account while assessing notional income for computing tax on book profit.

Words and Phrases:
D

'wfitten down value '-Meaning of

The question which arose in these appeals was whether the deductions
permissible under the provisions of the Income Tax Act can be considered to E
have been actually allowed when the assessee has been made liable to pay 30
per cent of the book profits in term of Section 115-J of the Act

It was contended for the assessees that since benefit of deduction was
not allowed while assessing income of the assessee for calculating tax on book
profit they should be permitted to carry forward the same for the relevant F
previous year under the provisions of the Act including Section 115-J; and
that assessable income under Section 115-J could not be extended to include
the fictional deductions.

On behalf of Revenue, it was submitted that under Section 115-J(2)
assessee could not be permitted to carry forward those deductions which had G
already been allowed while assessing zero tax figure for the previous years.

Dismissing the appeals, the Court

HELD: l. The very object of the provision of Section 115-J is to tax such
companies which are making huge profits and also declaring substantial H
453
454 SUPREME COURT REPORTS [2002] SUPP. 4 S.C.R.

A 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.
1461-E, Fl
B
SwJ1alatha Spg. Mills Ltd. v. Union of India, (223 ITR 713), approved.

lallcherra Tea Co. (0) ltd. v. Commissioner of Income tax, 239 ITR
61! and Madeva Upendra Sinai v. Union of India and Ors. 98 ITR 209,
distinguished.
c
2.1. Section 115-J(l) provides for two stages. The first stage envisages
computation of income after taking into consideration all deductions allowable
under the Income Tax 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
D the assessee's 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 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 less than
E 30 per cent of the book profit, the deductions.claimed are not ignored but are
a necessary ingredient of the formula for applying the fictional total income.
1459-C, E-HJ

2.2. All that Section 115-J(2) does is to preserve the right to carry
forward the balance of the unabsorbed deductions in the relevant previous year
F to the next assessment year. Section 115-J does not 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(l), to be
carried forward under sub-section (2) of Section 115-J. It allows only the
unabsorbed losses, depreciation, investment allowance etc. which otherwise
G could have been carried forward, to be carried forward. This construction of
sub-sections (1) and (2) Section 115-J is in keeping with the avowed. purpose
for which Chapter XII-B was introduced in the Act by the Finance Act, 1987.
In addition, a contemporaneous exposition of the purport of Section ll 5~J is
contained in Circular No. 495 dated 22nd September 1987 issued by the
Central Board of Direct Taxes. Had Section 115-J not been introduced, the
H assessee would have been entitled under the provisions of Sections 32(2),
KARNATAKA S.S.l.D.C.L. v. C.l.T. [RUMA PAL. J.] 455

32A(3), 72(i)(ii), 73, 74, 74A(3) and 80(J)(3) to carry forward only the A
unabsorbed depreciation allowance under Section 32, investment allowance
under Section 32-A, losses under Sections 72, 72A, 73, 74 of the Act and
permissible deductions under Section 80J to the following assessment year
to be set off against the profits and gains of that assessment year.
[460-B-E, G; 461-H] B
Co111m;ssioner of /ncon1e T~x. Kanpur v. Mother India Refrigeration
Industrties, [1985[ 4 SCC I; Mancheri Puthusseri Ahmed v. Kuthiravattam
Estate Receiver, [1996] 6 SCC 185; Commissioner of Income Tax, Bombay
City Iv. Dharampur Leather Co. ltd. 60, ITR 165 and Madeva Upendra Sinai
v. Union of India and Ors. 98 ITR 209, distinguished. C
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 823 of 2000.

From the Judgment and Order dated 29.9.1999 of the Karnataka High
Court in TTRC No. 144 of 1995.

WITH D

Civil Appeal Nos. 824/2000, 825-826/2000, 2715-2716/2000, 3546-3547/
2001.

S. Ganesh, K.T. Anantharaman, Vasudevan Raghavan, and Dhruv Mehra
for M/s. K.L. Mehta & Co., for the Appellant. E
R.P. Bhat, Ms. Neera Gupta, Ranbir Chandra and Ms. Sushma Suri, for
the Respondent.

The Judgment of the Court )¥OS delivered by
F
RUMA PAL, J. All these appeals are disposed of by this common
judgment.

The assess~es who are in appeal before us are companies who have
been subjected to imposition of tax on 30% of their book profits in accordance
with section I 15J0) of the Income Tax Act, 1961 (referred to as the 'Act'). G
Section I 15J is in Chapter Xll-B of the Act which is entitled 'Special
Provisions Relating to Certain Companies'. It was inserted by the Finance
Act, 1987 with effect from the Assessment Year 1988-89 and remained in
operation till the Assessment Year 1990-91. The relevant extract of section H
456 SUPREME COURT REPORTS [2002] SUPP. 4 S.C.R.

A 1 15-J reads as follows:

"1 l 5J. ( l) Notwithstanding anything contained in any other provision
of this Act, where in the case of an assessee being a company other
than a company engaged in the business of generation or distribution
of electricity, the total income, as computed under this Act in respect
B of any previous year relevant to the assessment year commencing on
or after the ! st day of April, 1988 but before the 1st day of April 1991
(hereinafter 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
assessce chargeable to tax for the relevant previous year shall be
C deemed to be an amount equal to thirty per cent of such book profit.

(IA) Every assessee, being a company, shall, for the purposes of this
section, prepare its profit and loss account for the relev~nt previous
year in accordance with the provisions of Parts II and Ill of Schedule
VI to the Companies Act, 1956.
D
(2) Nothing contained in sub-section (I) 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 32-A or clause
E (ii) of sub-section (I) of Section 72 or section 73 or section 74 or sub-
section (3) of section 74A or sub-section (3) of section 801."

The question to be determined in all these appeals is whether the
deductions which are permissible -under the provisions of the Act can be
considered to have been actually allowed when the assessee has been made
F liable to pay 30 per cent of its book profits in terms of section 115-J of the
Act.

The Income Tax Appellate Tribunal, Bangalore Bench held that in
determining the total income of the assessee under other provisions of the
G Act, depreciation actually considered for calculating the taxable income shall
be the depreciation ~hich is deemed to have been actually allowed. According
to the Tribunal, this depreciation has to be considered while determining the
written down value of the assets for the subsequent assessment year even
though the taxable income of the assessee was determined with reference to
book profit pursuant to section. 115-J(l) of the Act. It also held that the
H scheme for levying tax by considering 30% of the book profit under section
KARNATAKA S.S.l.D.C.L. v. C.l.T. [RUMA PAL. .I.] 457

1151(1) to be the deemed total income, as "an artificial process super-imposed A
on the regular process of detennination of the total income of the assessee
in the usual n1anner".

The Tribunal at the instance of the assessee formulated the following
questions under section 256( I) of the Act and referred the same to the High
Court for its opinion: B
"I. Whether on the facts and in the circumstances of the case, the
Tribunal was right in holding that the amounts of business loss,
unabsorbed depreciation, unabsorbed investment allowance etc., as at
the beginning of the accounting year are required to be adjusted and
set off to the extent of such brought forward business loss, unabsorbed C
depreciation etc., would have been adjusted and set off had the
assessee been assessed to tax in the regular way in accordance with
the provisions of Sec.28 to 43 of the Income Tax Act, 1961 and not
by way of application of the provisions of Sec.l 15J(l) and that the
resultant amounts of losses, unabsorbed depreciation, unabsorbed D
investment allowance etc. only will be required to be carried forward
to the next year?

2. Whether, on the facts and in the circumstances of the case, the
Tribunal was right in holding that the written down values of the
assets will have to be adjusted by deducting therefrom the amounts E
of depreciation which .would have been allowed on such assets in the
regular method of assessment in accordance with the provisions of
Section 28 to 43 of the Income Tax Act, 1961 without applying the
provisions of Section 1151( 1), and the resultant amounts of written
down values will only have to be carried forniard to the next year."
F
Similar orders were passed by the Tribunal in the case of other appellants.
The High Court by a comrrion order and judgment upheld the reasoning of
the Tribunal and answered the references in favour of the Revenue and
against the assessees.

According to Mr. S. Ganesh, learned senior counsel appearing on behalf G
of one of the appellants, an assessee-company which was otherwise entitled
to various deductions under the provisions of the Act from its total income,
in computing its total income, was liable under section 115-l to pay tax of 30
per cent of the company's book profit irrespective of the actual deductions
claimed by it for the period when section 115-J was in operation. It is submitted H
458 SUPREME COURT REPORTS [2002] SUPP. 4 S.C.R.

A that in such circumstances it cannot be said that the benefits of deduction
which the assessee had claimed had been actually allowed and, therefore. the
assessee/appellant should have been permitted to carry forward the unabsorbed
investment allowance or depreciation claimed by it for the relevant previous
year, under the provisions of sub-section (2) of section 115-J read with
B sections 32-A and 32-A (3)(iii). Reliance was placed on section 43(6) which
defines 'written down value' as meaning the actual cost of the asset less
depreciation actually allowed. It is submitted that therefore in computing the
income for the next assessment year the assessee who had paid 30 per cent
of the book profit in the preceding assessment year could claim to adjust the
depreciation and investment allowance since the depreciation and the
C investment allowance claimed in the preceding year had not been actually
allowed. Reliance has been placed on the decisions reported in Commissioner
ofIncome Tax, Bombay City Iv. Dharampur Leather Co. Ltd, 60 ITR 165 and
Madeva Upendra Sinai v. Union of India and Ors., 98 ITR 209 in support of
this submission. According to the Mr. Ganesh, the entire investment allowance
and unabsorbed depreciation as on April 1998 remained intact and was not
D written off or obliterated by computation of income of 30 per cent of the book
profit under section 115-J.

Mr. Dhruv Mehta, learned counsel for another appellant/assessee has
adopted these arguments and has further submitted that the fiction of the
E assessable income under section 115-J could not be extended to include the
fictional deductions. It was stated that where deductions were sought to be
adjusted, this has been expressly provided for, as for example under section
44 AD, sub-section (2) & (3) and section 44 AF, sub-sections (2) & (3). ....
Reference has been made to the decisions of this Court in Commissioner of
Income Tax, Kanpur v. Mother India Refrigeration Industries [1985] 4 SCC
F I (para 10) and Mancheri Puthusseri Ahmed v. Kuthiravattam Estate Receiver
[ 1996] 6 sec 185 to contend that a statutory fiction must be limited strictly
to the purpose for which it is introduced. In any event, it is submitted by
learned counsel that if there were any doubt in the interpretation of the
provisions, the· doubt must be resolved in favour of the assessee on the basis
G of the principles enunciated in Commissioner of Income Tax, Bangalore v.
A.H Got/a, 56 ITR 323.
,..
Mr. R.P. Bhat, learned senior counsel appearing on behalf of the Revenue
has submitted that section 115-J was aimed at those companies which were
in fact profit making but submitted 'nil' assessments of their total income by
H virtue of the deductions permitted under the Act. In the case of such "zero-
J

KARNATAKA,S.S.l.D.C.L. v. C.l.T. [RUMA PAL. J.] 459

tax companies", the intention of section 115-J was to levy tax on such A
con1panies by fixing a notional asssessable income \Vhich was 30 per cent of
the book profit. Learned counsel has relied upon the reasoning of the decision
of the Division Bench of the Andhra Pradesh High Court in Surya/at ha Spg.
Mills Ltd. v. Union of India, (223 ITR 713) and has submitted that the
assessee cannot under section 115-J (2), be permitted to carry forward those
deductions which had already been claimed and allowed by the Department B
in arriving at the zero assessment figure. According to Mr. Bhat, had the
deductions not been actually allowed as claimed by the appellant, then the
assessee would not have been liable to pay only the tax on the book profit
but tax on the actual income.

The constitutional validity of section 115-J of the Act is not in dispute
c
before us. The only issue is its interpretation.

Section 115-J(I) commences with a non obstante clause. Plainly read, it
provides for two stages:

(a) computation of income of the assessee under the Act in respect D
of any previous year relevant to the assessment year commencing
• on or after lst April 1988 and before lst July 1991;
(b) If the income as computed under the Act in respect of the
relevant previous year is less than 30 per cent of its book profit,
then the deemed total income of the assessee chargeable to tax E
for the relevant previous year would be equal to 30 per cent of

- the book profit.

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 F
resultant income is less than 30 per cent of the book profit, that the assessee's
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
pennissible under the Act. However, it cannot be said that therefore the G
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 the 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 H
460 SUPREME COURT REPORTS [2002] SUPP. 4 S.C.R.

A 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 1151(1) only then is the
assessee required to pay on a notional income of 30 per cent of its book
B profits.

Had sections 1151 not been introduced, the assessee would have been
entitled under the provisions of sections 32(2), 32(A)(3), 72(1) (ii), 73, 74,
74A(3) and 80(1)(3) to carry forward only the unabsorbed depreciation
allowance under section 32, investment allowance under section 32-A, losses
C under sections 72; 72A, 73, 74 and permissible deductions under section 801
to the following assessment year to be set off against the profits and gains
of that assessment year. All that section 115-1(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 J 15-J does not create any
right nor does it serve to allow all the deductions taken into consideration
D 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.

This construction of sub sections (I) and (2) section 115J is in keeping
E with the avowed purpose for which Chapter XII-B was introduced in the Act
by the Finance Act, 1987. This was stated by the Finance Minister in his
budget speech in the following manner: ...
"It is only fair and proper that the prosperous should pay at least
some tax. The phenomenon of so called 'zero-tax' highly profitable
F companies deser\ies attention. In 1983, a new section 80VV A was
inserted in the Act so that all profitable companies pay some tax. This
does not seem to have helped and is being withdrawn. I now propose
to introduce a provision whereby every company will have to pay a
'minimum corporate tax' on the profits declared by it in its own
accounts. Under this new provision, a company will pay tax on at least
G
30 per cent, of its book profit This measure will yield a revenue gain
of approximately Rs. 75 crores."

In addition, a contemporaneous exposition of the purport of section
I. Reported in (I 987) 165 ITR (St.) 14
H 2. Reported in 168 !TR (St.) p. 87 at page 111
KARNATAKA S.S.l.D.C.L. v. C.J.T. [RUMA PAL. J.] 461

I 15J is contained in Circular No. 495 dated 22nd September 1987 issued by A
the Central Board of Direct Taxes. The Circular gives explanatory notes on the
provisions relating to direct tax in the Finance Act. With reference to section
I I 5J, it was said:

"Section I 15J, therefore, involves two processes. Firstly, an
assessing authority has to determine the income of the company B
under the provisions of the Income-tax Act. Secondly, the book profit
is to be worked out in accordance with the Explanation to section
I 15J(I) 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 I 15J
would be invoked ifthe income determined under the first process is C
less than 30 percent of the book profit. The Explanation to sub-
section(!) of section I 15J 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 D
application of this pmvision would not affect the carry forward of
unabsorbed depreciation, unabsorbed investment allo\vance, business
losses to the extent not set off, and deduction under section SOJ, to
the extent not set off as computed under the Income-tax Act".

The Division Bench of the Andhra Pradesh High Court in Suryalatha E
Spg. Mills Ltd. (supra) had construed section 11 SJ in favour of the Revenue
inter alia because: "the very object of the provision of section I I 5J 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 F
that purpose the taxable income is determined under sub-section (I) of section
1I5J, 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.

In Lallcherra Tea Co. (0) Ltd. v. Commissioner of l!Jcome Tax, 239 !TR G.
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 (I), 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 H
462 SUPREME COURT REPORTS [2002] SUPP. 4 S.G.R.

A 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 Couti held in favour of the assessee
on the basis of a hypothetical example which, in our view, proceeds on a
B complete mis-appreciation of section 115-J.

The decision of this Court in Madeva Upendra Sinai v. 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
C 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 val.ue' in so far as it is relevant:

(a) in the case of assets acquired in the previous year, the actual
cost to the assessee;
D (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.
E

H
KARNATAKA S.S.l.D.C.L. v. C.l.T. [RUMA PAL, J.] 463

· Since there \Vas no la\V betvv'een the date the territories were merged in A
India and the date when the Income Tax Act was extended to those territories
under \Vhich the inco1ne of those prior years could be co1nputed, there was
no question of any depreciation being clai1ned, 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 Iv. Dharampur leather
Co. ltd. (supra). Both decisions are distinguishable since, for the reasons B
stated we have held that there is no notional but actual deduction in this case.

For the reasons aforesaid, we .have no hesitation in confinning the
decision of the High Court and dismissing these appeals with costs.

S.K.S. Appeals dismissed. C

-