DEPUTY COMMISSIONER OF INCOME TAX Vs. V V TRANS INVESTMENTS PRIVATE LIMITED SURANA STEELS PRIVATE LIMITED BINJUSARIA METAL BOX CO PRIVATE LIMITED KEDIA LEATHER AND LIQUORS PRIVATE LIMITED

JUDGEMENT

(1.) JUDGMENT

(2.) . This is a batch of eight matters before this court. The routes through which the different matters travelled up to the High court were different. Some were reference applications under section 256(1 of the Income-tax Act, 1961, and some were writ petitions filed before the High court. All the matters have stood disposed <PG>176</PG> of consistently with the view taken by the division bench of the High court of Andhra Pradesh in the leading judgment which is reported as V. V. Trans-investments (P) Ltd. v COMMISSIONER OF INCOME TAX 1999 3 Comp LJ 181 (AP) : 1994 207 ITR 508 (AP) and also impugned herein. In all the matters the question arising for decision is in substance only one : "Whether the term. loss' as appearing in section 205(1, first proviso, clause (b), of the Companies Act, 1956, read with section 115J of the Income-tax Act, 1961, means 'including depreciation'. 2. In order to appreciate the bone of contention, it would suffice to state the facts relevant to one of the assessees, namely, M/s V.V. Trans-Investment (P) Ltd., Hyderabad, a private limited company. The figures of net profit and loss as per the profit and loss account of the company were as follows : Assessment Profit/loss Depreciation debited to year P and L account Rs. 1,987-88 (+) 3,087 1988-89 (+) 35,79,997.00, 67,75,759.00 (profit before depreciation) (-) 31,95,762 (loss after depreciation) 1989-90 (+) 28,37,947.00. 3,534.00 2.1 The assessee company had filed its return of income disclosing 'nil' income after setting off a part of arrears of depreciation against the current year's profit of Rs. 28,37,947.00. The contention of the assessee was that for the accounting year relevant to the assessment year under consideration, there was no book profit after adjustment of the earlier years' loss against the current year's profit. The Income-tax Officer, however, computed the book profit under section 115J of the Income-tax Act at Rs. 8,51,380.00, being 30 per cent of the current year's profit of Rs. 28,37,947.00 as per the profit and loss account. According to the Income-tax Officer, for arriving at the adjusted book profit, unabsorbed depreciation or business loss, whichever is less, is to be adjusted. Since there was no business loss in earlier years as per the books of account, the amount to be set off was considered as 'nil', whereas the assessee contended that earlier year's loss of Rs. 31,94,136.00, which in fact was unabsorbed depreciation was to be deducted from current year's profit of Rs. 28,37,947.00 before arriving at the book profit under section 205(1, first proviso, clause (b), of the Companies Act, 1956. 2.2 The Commissioner of Income-tax (Appeals) and the tribunal have upheld the view of the Income-tax Officer. On an application made by the assessee, questions of law were framed and referred for the opinion of the High court. In a few other matters, a Special bench was constituted by the tribunal forming an opinion that there was conflict in decisions of the tribunal on this issue. The Special bench of the tribunal has formed an opinion against [in favour of ?] the assessee. The High court has answered the reference made by the tribunal in favour of Department and against the assessee. In the opinion of the High court the term loss' as used in section 205(1, first proviso, clause (b), of the Companies Act, 1956, read with section 115J of the Income-taxAct,1961,does not mean 'including depreciation'. In other words, the High court has held that the assessee is entitled to deduct depreciation or loss, whichever is less, only in the eventuality when in a given year, there is loss as well as <PG>177</PG> depreciation. In such a case, the lesser of the two amounts will be available for deduction as per the provisions of the Income-tax Act, 1961. In case, there is profit in a year, but after adjustment of depreciation, it results in loss, no adjustment in the book profit under section 115J can be allowed. 3. The relevant provisions, to the extent relevant for the purpose of this order, are extracted and reproduced hereunder : Income-tax Act ,1961 "115J. Special provisions relating to certain companies.-(1 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 of any previous .year relevant to the assessment year commencing on or after the 1st day of April, 1988, but before the 1st day of April, 1991 (hereafter 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. (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 III of Schedule VI to the Companies Act, 1956 (I of 1956. Explanation.-For the purpose of this section, 'book profit' means the net profit as shown in the profit and loss account for the relevant previous year prepared under Ss. (1A), as increased by - ..... [if any amount referred to in clauses (a) to (f) is debited or, as the case may be, the amount referred to in clauses (g) and (h) is not credited to the profit and loss account,] and as reduced by,-. . . (iv) the amount of the loss or the amount of depreciation which would be required to be set off against the profit of the relevant previous year as if the provisions of clause (b) of the first proviso to Ss. (1 of section 205 of the Companies Act, 1956 (I of 1956, are applicable. (2 Nothing contained in Ss. (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 Ss. (2 of section 32 or subsection (3 of section 32A or clause (ii) of sub-section (1 of section 72 or section 73 or section 74 or Ss. (3 of section 74A or Ss. (3 of section 80]." Companies Act, 1956 "205. Dividend to be paid only out of profits- (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 Ss. (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 Provided that -.... (b) if the company has incurred any loss in any previous financial year or years, which falls or fall after the commencement of the Companies <PG>178</PG> (Amendment) Act, 1960, then, the amount of the loss or an amount which is equal to the amount provided for depreciation for that year or those years whichever is less, shall be set off against the profits of the company for the year for which dividend is proposed to be declared or paid or against the profits of the company for any previous financial year or years, arrived at in both cases after providing for depreciation in accordance with the provisions of Ss. (2 or against both ; . . . ." 4. Section 115J was introduced in the assessment year 1988-89 to take care of the phenomenon of prosperous zero-tax companies which had continued in spite of the enactment of section 80WA. There were companies which were paying no income- tax though they had profits and were declaring dividends. A minimum corporate tax was sought to be ensured on prosperous companies. A plain reading of section 115J shows that if the assessee be a company, and its total income determined under the Income-tax Act in respect of a previous year be less than thirty per cent of its book profits, fictionally, it will be deemed that its total income chargeable to tax for the relevant previous year was an amount equal to thirty per cent of such book profit. The total income of the assessee shall first be computed in accordance with provisions of Income-tax Act, and if the total income so computed be less than thirty per cent of the book profit than profit and loss account of the company for the relevant previous year shall have to be prepared under Ss. (1A) of section 115J in accordance with Parts II and III or Schedule VI of the Companies Act. The book profit so arrived at under the Companies Act shall be suitably adjusted so as to satisfy the requirements of the Explanation. We are in this case, concerned with the interpretation of clause (iv) under the Explanation to section 115J. 5. Mr. Parasaran, the learned Sr. Adv. appearing for one of the assessees has submitted that the court should assign such meaning to the language of statute as would best serve the purpose sought to be achieved by an enactment. He further submitted that speech of Finance Minister moving the Bill can be referred to for ascertaining the object behind. Finding out and making use of parliamentary history for construing statutes is a modern trend which is gaining ground. Under the rule laid down in Pepper v Hart 1993 1 All ER 42 (HL), a Minister's speech is admissible as an external aid to construction. In India, the decided cases have attempted at drawing a distinction between using the Minister's speech as a material for finding out the mischief to be remedied and the object or purpose of a legislation and using it for finding out the legislative intent. The distinction has been criticised as artificial and inappropriate with a suggestion that a time has now come to abandon it. 5.1 In the Budget Speech of 1987, the Minister of Finance, referring to the proposed section 115J explained the rationale behind its introduction in these words : "It is only fair and proper that the prosperous should pay at least some tax. The phenomenon of so-called zero-tax highly profitable companies deserves attention. In 1983, a new section 80VVA 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 30% of its book profit. This measure will yield a revenue gain of approximately 75 crores." It appears that representations were made by and on behalf of the companies pointing out certain hardships to companies of new projects which have just begun to make profits and companies which having fallen sick, were just turning around the <PG>179</PG> comer. The Finance Minister introduced an amendment during the passage of the Finance Bill and said : The Finance Bill inserts a new section 115J in the Income-tax Act, 1961, to levy a minimum tax on book profits of certain companies. Representations have been received that in computing book profits for the purpose of determining the minimum tax, losses and unabsorbed depreciation pertaining to earlier years should be allowed to set off. Otherwise, new projects that have just begun to make profits will become subject to minimum tax. There is merit in this suggestion. Under section 205 of the Companies Act, 1956, past losses or unabsorbed depreciation, whichever is less, are allowed to be set off against the book profits of the current year for determining profits for the purpose of declaring dividend. It is proposed to allow the same adjustments in computation of book profits for purposes of the new provision for levy of minimum tax." Mr. Parasaran also referred to a passage from A. Ramaiya's Commentary on the Companies Act, 1956 (14th Edition, 1988 at page 1498 wherein the learned author has referred to the established corporate practice and opined that the word loss' in proviso (b) to section 205(1 would include 'depreciation'. In accounting parlance and in commercial sense, the word 'loss' is always taken as including 'depreciation'. If depreciation were to be excluded, the legislature would have used the term 'cash loss'. A comparison may be made with the language employed in section 3(0 of the Sick Industrial Companies (Special Provisions) Act, 1985, wherein a distinction is made between 'accumulated loss' and 'cash loss'. The learned senior counsel also referred to Garden Silk Weaving Factory v COMMISSIONER OF INCOME TAX 1991 189 ITR 512 (SC) wherein this court has held that unabsorbed depreciation was part of loss. The learned counsel also referred to section 349(4(l) the Companies Act which uses the expression 'excess of expenditure over income' which is narrower in scope and excludes depreciation. We find substance in the submission. There is no reason to assign to the term loss' as occurring in section 205, proviso, clause (b), of the Companies Act - a meaning different from the one in which it is understood thereat solely because it is being read along with section 115J of the Income-tax Act. 6. Section 115J, Explanation clause (iv), is a piece of legislation by incorporation. Dealing with the subject. Justice G.P. Singh states in Principles of Statutory Interpretation (7th Edition, 1999 : Incorporation of an earlier Act into a later Act is a legislative device adopted for the sake of convenience in order to avoid verbatim reproduction of the provisions of the earlier Act into the later. When an earlier Act or certain of its provisions are incorporated by reference into a later Act, the provisions so incorporated become part and parcel of the later Act as if they had been 'bodily transposed into if. The effect of incorporation is admirably stated by Lord Esher, M.r. : 'if a subsequent Act brings into itself by reference some of the clauses of a former Act, the legal effect of that, as has often been held, is to write those S. into the new Act, as if they had been actually written in it with the pen, or printed in it.' . . . Even though only particular S. of an earlier Act are incorporated into later, in construing the incorporated sections, it may be at times necessary and permissible to refer to other parts of the earlier statue which are not incorporated. As was stated by Lord Black burn : 'When a single section of an Act of Parliament is introduced into another Act, I think, it must be read in the sense it bore in the original Act from which it was <PG>180</PG> taken, and that consequently, it is perfectly legitimate to refer to all the rest of that Act in order to ascertain what the section meant, though those other S. are not incorporated in the new Act', (page 244 6.1. Once we have ascertained the object behind the legislation and held that the provisions of section 205 quoted hereinabove stand bodily lifted and incorporated into the body of section 115J of the Income-tax Act, all that we have to do is to read the provisions plainly and apply rules of interpretation, if any ambiguity survives. Section 205(1, proviso, clause (b), of the Companies Act brings out the unabsorbed portion of the amount of depreciation already provided for computing the loss for the year. The words - 'the amount provided for depreciation' and 'arrived at in both cases after providing for depreciation' make it abundantly clear that in this clause, 'loss' refers to the amount of loss arrived at after taking into account the amount of depreciation provided in the profit and loss account. "The significance of the formula prescribed in clause (b) of the proviso to section 205(1 of the Companies Act can well be demonstrated by two examples as given hereunder : Example Amount of Amount of Loss for the year profit/loss depreciation after taking into provided account the depreciation 1 (+) 1 lakh 3 lakhs 2 lakhs 2 (-) 1 lakh 3 lakhs 4 lakhs In example 1, Rs. 3 lakhs is the depreciation. Rs. 2 lakhs is the loss after taking into account the depreciation. The loss being lower than the amount of depreciation, it will be taken into account for set off against the profit of the year in which dividend is to be declared. In example 2, Rs. 3 lakhs is the depreciation. Rs. 4 lakhs is the amount of loss after taking into account the depreciation. "The depreciation being lower than the amount of Rs. 3 lakhs is to be taken into account for set off against the profit of the year for which dividend is to be declared. We are of the opinion that the term loss' as occurring in clause (b) of the proviso to section 205(1 of the Companies Act has to be understood and read as the amount arrived at after taking into account the depreciation. Then alone the formula prescribed in this clause would make sense, and it would be consistent with the object sought to be achieved by enacting section 115J of the Income-tax Act, 1961. If loss' were to be taken as pre-depreciation loss, then the resultant computation will not be in conformity with the tenor of the provisions of ' section 205. The language of clause (b) of the proviso to section 205(1 is clear. It applies to those cases where the depreciation has been provided in accordance with the provisions of Ss. (1 of section 205. The depreciation is provided for in the profit and loss account. The loss is arrived at after taking into account the depreciation, provided. It is, therefore, clear that the word loss' as used in proviso to clause (b) to section 205(1 signifies the amount arrived at after taking into account the amount of depreciation, and it has to be so read and understood in the context of section 115J of the Income-tax Act, 1961. We do not agree with the view taken by the High court that in case there is profit in a year but after adjustment of depreciation it results in loss, no adjustment in the book profit under section 115J can be allowed. The view taken by the High court would partially defeat the object sought to be achieved by <PG>181</PG> section 115J of the Income-tax Act, 1961. We also do not agree with the High court saying that having lifted section 205(1 from the Companies Act into section 115J of the Income-tax Act, there is no occasion to refer to the Companies Act, 1956, at all. 7. For the foregoing reasons, C.A. Nos. 4471 of 1995, 4472 of 1995 and CA Nos. 180-181(NT)/95, filed by (1 M/s Surana Steels (P) Ltd., (2 V.V. Trans-investment (P) Ltd., Hyderabad, and (3 M/s Binju saria Metal Box Co. (P) Ltd., Hyderabad, respectively, are allowed. The order under appeal passed by the High court of Andhra Pradesh is set aside. 8. C.A. No. 7589(NT) of 1997 is directed against order, dated 31/07/1996, passed by the High court after rejecting the application under section 256(2 of the Income- tax Act, 1961, filed by the assessee seeking reference on similar questions of law and upholding rejection of similar application under section 256(1 by the tribunal. The High court and the tribunal, both have opined that no referable question of law arose. The appeal stands allowed and the questions sought to be referred by the assessee stand answered in accordance with the view taken by us hereinabove. 9. C.A. No. 1663/1997, Special Leave Petition Nos. 12388/1997 and 13429/1997, all preferred by the Revenue, are dismissed. V.V. TRANS-INVESTMENTS (P) LTD. V COMMISSIONER OF INCOME-TAX : DEPUTY COMMISSIONER OF INCOME-TAX V SURANA STEELS (P) LTD.3 : DEPUTY COMMISSIONER OF INCOME-TAX V BINJUSARIA METAL BOX CO. (P) LTD." : ASSISTANT COMMISSIONER OF INCOME-TAX V AGROHA EXTRACTION LTD. AND ANOTHER 1999 3 Comp LJ 181 (AP) CASES CITED BOLANI ORES LTD. V STATE OF orissa AIR 1975 SC 17. BUTTWELDED TOOLS (P) LTD. V ASST. COMMISSIONER OF INCOME TAX 1991 39 ITD 432 (ITAT, MAD), COMMISSIONER OF INCOME TAX V ANUSUYA DEVI 1968 68 ITR 750 (SC). COMMISSIONER OF INCOME TAX V INDIAN JUTE MILLS ASSOCIATION 1982 134 ITR 68 (CAL). COMMISSIONER OF INCOME TAX V JAIPURIA CHINA CLAY MINES (P) LTD. 1966 59 ITR 555 (SC). COMMISSIONER OF INCOME TAX V MOTHER INDIA REFRIGERATION INDUSTRIES (P) LTD. 1985 155 ITR 711 (SC). COMMISSIONER OF INCOME TAX V SOCIETY OF THE SISTERS OF ST. ANNE 1984 146 ITR 28 (KARN). CLARKE V BRADLAUGH (1881 8 OBD 63 (CA). GARDEN SILK WEAVING FACTORY V COMMISSIONER OF INCOME TAX 1991 189 ITR 512 (SC). HINDUSTAN VACUUM GLASS LTD. v COMMISSIONER OF INCOME TAX 1985 3 COMP LJ 379 (SC): 1985 155 ITR 711 (SC). MAHARAJA SHRI UMAID MILLS V COMMISSIONER OF INCOME TAX 1984 149 ITR 519 (RAJ). MAHINDRA AND MAHINDRA LTD. v UNION OF INDIA 1979 49 COMP CAS 419 (SC). 2 Reference Case No. 126 of 1992, decided by V. Sivaraman Nair and S.V. Maruthi, JJ., of the Andhra Pradesh High court on 31/12/1993. 3 W.P. No. 5408 of 1993, decided by V. Sivaraman Nair and S.V. Maruthi, JJ., of the A. P. High court on 31/12/1993. 4 W.P. No. 6102 of 1993, decided by V. Sivaraman Nair and S.V. Maruthi, JJ., of the A. P. High court on 31/12/1993. 5 W.P. No. 6141 of 1993, decided by V, Sivaraman Nair and S.V. Maruthi, JJ" of the A. P. High court on 31/12/1993. <PG>182</PG> ONKARLAL NANDLAL v STATE OF RAJASTHAN 1985 4 SCC 404 : AIR 1986 SC 2146. secretary OF STATE FOR INDIA IN council V HINDUSTAN CO-OPERATIVE INSURANCE SOCIETY LTD. AIR 1931 PC 149. SHAMRAO V. PARULEKAR V DISTRICT MAGISTRATE, THANE AIR 1952 SC 324. V.V. TRANS-INVESTMENTS (P) LTD. v ITO 1992 42 ITD 242 (ITAT, HYD). VENKATARATNAM (K. CH.) v CGT 1974 95 ITR 277 (AP). WOOD'S ESTATE, IN RE (1886 31 CH D 607 (CA). COUNSEL K. RANGANATHACHARY, Advocate, for the assessee, HABEEB ANSARI, Advocate, for the Commissioner in r. C. No. 126 of 1992. S.r. ASHOK and D. SRINIVAS, Advocates, for the petitioner in all the writ petitions, Y. RATNAKAR, Advocate, for respondent 1 in W.P. No. 5408 of 1993. S. RAVI and SANJAYKISHORE, Advocates, for respondent 1 in W.P. Nos. 6102 and 6141 of 1993. P. INNAYA REDDY, Advocate for respondent 2 in all the writ petitions. Reference Case No. 126 of 1992 arises out of the order of the Income-tax Appellate tribunal in I.T.A. No. 1822/(Hyd) of 1990, dated 23/03/1992. Messrs. V.V. Trans-investments (P) Ltd., Hyderabad, aggrieved by the said order made a Reference Application No. 101/(Hyd) of 1992, before the Appellate tribunal to refer to this court certain questions of law for the opinion of this court. <DJG>S.V. MARUTHI, J</DJG>

(3.) . In r. C. No. 126 of 1992, the Hyderabad bench of the Income-tax Appellate tribunal, consisting of Sri N.D. Raghavan and Sri Chander Singh, disposed of an appeal filed by the assessee, M/s. V.V. Trans-investments (P) Ltd., Hyderabad, for the assessment year 1989-90, holding that the loss' as it appears under section 205(1, first proviso, clause (b), of the Companies Act which was incorporated by reference under section 115J of the Income-tax Act, means excluding depreciation. The tribunal also <PG>183</PG> firmed the view expressed by the Income-tax Officer and the Commissioner of Income- tax that for arriving at the adjusted book profit, unabsorbed depreciation or business loss, whichever is less, is to be adjusted. Since there was no business loss in earlier years as per the books of account, the amount to be set off was considered as 'Nil'. Pursuant to a request made by the assessee requiring the tribunal to refer certain questions to this court, the tribunal by order dated 30/09/1992, referred the following questions under section 256(1 of the Income-tax Act for the opinion of this court; "1. Whether, on the facts and in the circumstances of the case, the interpretation sought to be, put on section 115J of the Income-tax Act by the Appellate Tribunal is correct in law ? 2. Whether, on the facts and in the circumstances of the case, the Appellate tribunal was justified in law in holding that loss' as it appears in section 205(1, first proviso, clause (b) of the Companies Act, 1956, read with section 115J of the Income-tax Act, 1961, means 'including depreciation' ? 3. Whether, on the facts and in the circumstances of the case, the Appellate tribunal was right in law in placing reliance on the central Board of Direct Taxes' Circular No. 495, dated 22/09/1987 ? 4. Whether, on the facts and in the circumstances of the case, the Appellate tribunal was justified in law in refusing to admit the additional ground ?"