M/S. DYNAMIC ORTHOPEDICS PVT. LTD.versusCOMMISSIONER OF INCOME TAX, COCHIN, KERALA

                     [201 O] 2 S.C.R. 879


         MIS. DYNAMIC ORTHOPEDICS PVT. LTD.                       A
                               v.
  COMMISSIONER OF INCOME TAX, COCHIN, KERALA
           (Civil Appeal No. 8419 of 2003)

                    FEBRUARY 16, 2010
                                                                   B
          [S.H. KAPADIA AND AFTAB ALAM, JJ.]

     Income Tax Act, 1961:

      s. 115-J - Book profit - Depreciation - Assessee             c
 providing for depreciation under r. 5 of Income Tax Rules, but
 Assessing Officer allowing depreciation as per Schedule XIV
 to the Companies Act - High Court upholding the view of
 Assessing Officer - But, similar view of High Court in CIT vs.
 Malaya/a Manorama Company Ltd.* stood reversed by D
judgment of Supreme Court in Malaya/a Manorama
Company Ltd. vs. CIT** - HELD: Section 115J of the 1961
Act is a special provision relating only to certain Companies
- The whole purpose of s. 115J was to take care of the
phenomenon of prosperous 'zero tax' Companies not paying E
taxes though they continued to earn profits and declare
dividends - Therefore, a Minimum Alternate Tax was sought
to be imposed on 'zero tax' Companies - Section 115J
imposes tax on a deemed income - The said section does
not make any distinction between public and private limited F
companies - Once a company falls within the ambit of its
being MAT company, s. 115 J applies and the company would
be required to prepare its profits and loss accounts only in
terms of parts II and Ill of Schedule VI to 1956 Act - Section
 115J of the 1961 Act legislatively only incorporates provisions
of Parts II and Ill of Schedule VI to 1956 Act - Such G
incorporation is by a deeming fiction - Therefore, s. 115J (1A)
of the 1961 Act is needed to be read in strict sense - If so
read, it is clear that, by legislative incorporation, only Parts II
and Ill of Schedule VI to 1956 Act have been incorporated
                                879                                 H
         880      SUPREME COURT REPORTS                  [2010] 2 S.C.R.


     A legislatively into s. 115J of the 1961 Act - Therefore, the
         question of applicability of Parts II and /// of Schedule VI to
         1956 Act does not arise - If the judgement of Supreme Court
,.       in Malaya/a Manorama Company Limited is to be accepted,
         then the very purpose of enacting s. 115J of the 1961 Act would
     B   stand defeated - The view of the Kera/a High Court has been
         wrongly reversed by Supreme Court - The matter needs re-
         consideration by a larger Bench of the Court - Income Tax
         Rules, 1962 - r.5 - Companies Act, 1956 - Schedule VI -
         Parts II and /// and Schedule XIV.
     c      *Commissioner of Income Tax vs. Malaya/a Manorama
         Company Limited [2002] 253 l.T.R. 378 (Kerala), approved.

             **Malaya/a Manorama Company Limited vs.
         Commissioner of Income Tax [2008] 300 l.T.R.251, referred
     D   to.

                               Case Law Reference:
          [2002] 253 l.T.R. 378 (Kerala)      app_roved        para 6
     E     [2008] 300 l.T.R. 251              referred to      para 6

             CIVIL APPELLATE JURISDICTION : Civil Appeal No.
         8419 of 2003.

             From the Judgment & Order dated 5.7.2002 of the High
     F   Court of Kerala at Ernakulam in ITA No. 66 of 1999.

               M.S. Ananth, Subramonium Prasad for the Appellant.

           Vivek Tankha, ASG, H. Raghavendra Rao, R.
       Venkataramani, Lakshmi Iyengar, D.K. Singh, B.V. Balaram
     G Das for the Respondent.

               The Order of the Court was delivered by

                                     ORDER

     H         S.H. KAPADIA, J. A short question which arises for
  DYNAMIC ORTHOPEDICS PVT. LTD. v. COMMNR. OF             881
   INCOME TAX, COCHIN, KERALA [S.H. KAPADIA, J.]

determination in this civil appeal is - whether the Income Tax   A
Appellate Tribunal was, on the facts and circumstances of this
case, justified in upholding the order of the Commissioner of
Income Tax (Appeals) directing the Assessing Officer to allow
the claim of depreciation as per the Income Tax Rules, 1962,
for the purposes of computing the book profit under Section      B
115J of the Income Tax Act, 1961?

    In this civil appeal, we are concerned with Assessment
Year 1990-1991.

      The appellant-assessee is a private limited of company C
 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 Profit and Loss Account,
depreciation was provided at the rates specified in Rule 5 of
the Income Tax Rules, 1962 ['Rules', for short]. While completing D
the assessment of income, the Assessing Officer re-computed
the book profit for the purpose of Section 115J of the Income
Tax Act, 1961, ['Act', for short], after allowing depreciation as
per Schedule XIV to the Companies Act. The rates of
depreciation specified in Schedule XIV to the Companies Act, E
      r
1956 1956 Act' for short] were lower than the rates specified
                I


un~er Rule 5 of the Rules. Being aggrieved by the assessment
order, the assessee took up the matter before the
Commissioner of Income Tax [Appeals] ['C.l.T.(A)', for short],
who came to the conclusion that the assessee was a private F
limited company. It was not a subsidiary of a public company.
Therefore, placing reliance on Section 355 of 1956 Act, the
C.l.T. (A) held that Section 350of1956 Act was not applicable
to the assessee and, in the circumstances, t11e Income Tax
Officer had erred in providing depreciation at the rates
specified under Schedule XIV to 1956 Act. Consequently, the G
C.l.T.(A) held that the assessee was right in providing
depreciation in its accounts as per Rule 5 of the Rules.
Aggrieved by the decision of the C.l.T.(A), LT.A. No.115 of 1993
wa& preferred by the Department to the Income Tax Appellate H
                                                          •/

    882      SUPREME COURT REPORTS               [201 O] 2 S.C.R.


A   Tribunal ['Tribunal', for short]. By judgement and order dated
    13th January, 1999, the Tribunal held that, since the assessee
    was a private limited company, Section 349 and Section 350
    were not applicable to the facts of the case and, in the
    circumstances, the Income Tax Officer had erred in directing
B   the assessee, which was a private limited company, to provide
    for depreciation as per Schedule XIV to 1956 Act, which was
    not applicable to the private limited companies [See Section
    355 of 1956 Act]. Consequently, the appeal filed by the
    Department before the Tribunal stood dismissed.
c       Aggrieved by the said decision of the Tribunal, the
  Department preferred l.T.A. No.66 of 1999 before the High
  Court of Kerala which held that Section 115J of the Act was
  introduced in Assessment Year 1988-1989 to take care of the
  phenomenon of prosperous 'zero tax' Companies which had
D continued despite the enactment of Section 80WA of the Act.
  These Companies were paying no income tax though they had
  profits and though they were declaring dividends. Consequently,
  Section 115J of the Act was inserted to levy a minimum tax on
  book profits of certain Companies. According to the High Court,
E Section 115J of the Act read with Explanation clause (iv), as it
  stood at the material time, was a piece of legislation by
  incorporation and, consequently, the provisions of Section 205
  of 1956 Act stood incorporated into Section 115J of the Act,
  hence, the Income Tax Officer was right in directing the
F assessee to provide for depreciation at the rate specified in
  Schedule XIV to 1956 Act and not in terms of Rule 5 of the
  Rules. Hence, this civil appeal is filed by the assessee.

       To answer the controversy, we quote hereinbelow the
G relevant provision(s) of the Companies Act, 1956, Income Tax
  Act, 1961, as it stood at the material time, as also Income Tax
  Rules; 1962:

          "Provisions of the Companies Act, 1956:

H
DYNAMIC ORTHOPEDICS PVT. LTD. v. COMMNR. OF               883
 INCOME TAX, COCHIN, KERALA [S.H. KAPADIA, J.]

  205.(1) No dividend shall be declared or paid by a             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-
  section
                                                                 B
  (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         C
  a guarantee given by that Government.

  349.(1) In computing for the purpose of section 348, the
  net profits of a company in any financial year--
                                                                 D
  [a] xxxx              xx xx              xx xx

  [bJ the sums specified in sub-section (4) shall be
  deducted, and those specified in sub-section (5) shall not
  be deducted.
                                                                 E
         xx xx           xxxx      xx xx

  [4] In making the computation aforesaid, the following sums
  shall be deducted:--

  [a] to [j] xxxx        xxxx                                    F

  [k] depreciation to the extent specified in sectlon 350.

  Ascertainment of depreciation.

  350. The amount of depreciation to be deducted in              G
  pursuance of clause (k) of sub-section (4) of section 349
  shall be the amount calculated with reference to the written
  down value of the assets as shown by the books of the
  company at the end of the financial year expiring at the
                                                                 H
      884       SUPREME COURT REPORTS     I
                                                        [201 O] 2 S.C.R.


A1          commencement of this Act or immediately thereafter and
            at the end of each subsequent financial year at the rate
            specified in Schedule XIV."

            Provisions of Income Tax Act, 1961:
. I

B           "115J.(1A).-- Every assessee, being a company, shall, for
            the purposes of this section, prepare its profit and loss
            account for the relevant previous year in accordance with
            the provisions of Parts II and Ill of Schedule VI to the
            Companies Act, 1956 (1 of 1956).

            [a] to [d] xxxx xxxx xxxx

            [e] the amount or amounts of dividends paid or proposed."

            Provisions of Income Tax Rules, 1962:
D
            "Depreciation.

            5.(1) Subject to the provisions of sub-rule (2), the allowance
            under clause (ii) of sub-section (1) of section 32 in respect
            of depreciation of any block of assets shall be calculated
Er          at the percentages specified in the second column of the
            Table in Appendix I to these rules on the written down value
            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."

       In this case, the question which arose for determination
  before the High Court was - whether the C.l.T.(A) was right in
  directing the Assessing Officer to allow the claim of depreciation
  made by the assessee as per the Income Tax Rules, 1962, for
G the purposes of computing the book profit under Section 115J
  of the Act, as it stood at the material time? The High Court
  allowed the appeal filed by the Department holding that the
  Assessing Officer was right in re-computing the book profit for
  the· purpose of Section 115J of the Act after allowing
H depreciation as per Schedule XIV to the 1956 Act and not as
 DYNAMIC ORTHOPEDICS PVT. LTD. v. COMMNR. OF 885
  INCOME TAX, COCHIN, KERALA [S.H. KAPADIA, J.]

per the rates specified in Rule 5 of the Income Tax Rules, 1962,    A
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 Commissioner of Income Tax vs. Malaya/a Manqrama
Company Limited, reported in [2002] 253 l.T.R. 378 (Kerala),
which High Court's judgement stood reversed by the judgement        B
of this Court in the case of Malaya/a Manorama Company
Limited vs. Commissioner of Income Tax, reported in [2008]
300 l.T.R.251.
      In our view, with respect, the judgement of this Court in
Malaya/a Manorama Company Limited vs. Commissioner of C
Income Tax, reported in [2008] 300 l.T.R.251. needs re-
consideration for the following reasons: Chapter Xll-B of the Act
containing "Special provisions relating to certain Companies"
was introduced in the Income Tax Act, 1961, by the Finance
Act, 1987, with effect from 1st April, 1988. In fact, Section 115J D
replaced Section SOWA of the Act. Section 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 E
company, chargeable to tax, shall be deemed to be an amount
equal to thirty per cent of such book profit. The whole purpose
of Section 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 F
dividends. Therefore, a Minimum Alternate Tax was sought to
be imposed on 'zero tax' Companies. Section 11 SJ of the Act
imposes tax on a deemed income. Section 11 SJ of the Act is
a special provision relating only to certain Companies. The said
section does not make any distinction between public and G
private limited companies. In our view, Section 11 SJ of the Act
legislatively only incorporates provisions of Parts II and Ill of
Schedule VI to 1956 Act. Such incorporation is by a deeming
fiction. Hence, we need to read Section 11qJ(1A) of the Act in
the strict sense. If we so read, it is clear that, by legislative H
    886      SUPREME COURT REPORTS                    [2010] 2 S.C.R.


A    incorporation, only Parts II and Ill of Schedule VI to 1956 Act
     have been incorporated legislatively into Section 115J of the
     Act. Therefore, the question of applicability of Parts II and Ill of
     Schedule VI to 1956 Act does not arise. If a Company is a MAT
     Company, then be it a private limited company or a public
B   ·limited company, for the purposes of Section 115J of the Act,
    the assessee-Company has to· prepare its profit and loss
     account in accordance with Parts II and Ill of Schedule VI to
     1956 Act alone. If, with respect, the judgement of this Court in
     Malayala Manorama Company Limited [supra] is to be
c    accepted, then the very purpose of enacting Section 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,
0    Section 115J of the Act applies and, under that section, such
     an assessee-Company was required to prepare its profit and
     loss account only in terms of Parts II and Ill of Schedule VI to
     1956 Act. The reason being that rates of dep.·eciation in Rule
     5 of the Income Tax Rules, 1962, are different from the rates
E   specified in Schedule XIV of 1956 Act. In fact, by the
     Companies (Amendment) Act, 1988, the linkage between the
    two has been expressly de-linked. Hence, what is incorporated
     in Section 115J is only Schedule VI and not Section 205 or
     Section 350 or Section 355. This was the view of the Kerala
    High Court in the case of Commissioner of Income Tax vs.
F   Malaya/a Manorama Company Limited, reported in [2002]
    253 l.T.R. 378 (Kerala), which has been wrongly reversed by
    this Court in the case of Malaya/a Manorama Company
    Limited vs. Commissioner of Income Tax, reported in [2008)
    300 l.T.R.251.
G
        For the afore-stated 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 re-consideration by a larger Bench of this Court.
H R.P.                              Appeal referred to larger Bench.